Earnings yield is a financial ratio that measures a company's profitability in relation to its stock price. It is calculated by dividing the company's earnings per share (EPS) by the current market price per share. The earning yield is expressed as a percentage, and it is an indicator of how much return an investor can expect to receive on their investment in the company's stock.
For example, if a company's EPS is $2.00 and its current market price per share is $50.00, the earnings yield would be 4%. This means that for every $50.00 invested in the company's stock, an investor can expect to receive $2.00 in earnings, or a 4% return on their investment.
There are different types of earnings:
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Trailing Earnings Yield: This is the earnings yield based on the company's historical earnings per share (EPS) over the past 12 months. It is calculated by dividing the company's EPS over the past 12 months by its current market price per share.
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Forward Earnings Yield: This is the earnings yield based on the company's projected earnings per share (EPS) over the next 12 months. It is calculated by dividing the company's projected EPS over the next 12 months by its current market price per share.
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Expected Earnings Yield: This is the earnings yield based on the company's projected earnings per share (EPS) over a longer period, typically 5 years. It is calculated by dividing the company's projected EPS over the next five years by its current market price per share.
It's important to note that the earning yield is not a guarantee of future performance; it's only an estimation, and it can be affected by many factors such as market conditions, the economic environment, the company's management, and others.
Investors can use the earnings yield to compare the profitability of different companies and make decisions about which companies to invest in. In general, a higher earnings yield is considered to be more attractive, as it indicates that the company is more profitable and is therefore more likely to provide a higher return on investment. However, it's important to also consider other financial metrics, such as the price-to-earnings ratio and the company's debt levels, when making investment decisions.
Additionally, earning yield can be used to compare the profitability of different companies within the same industry. For instance, if two companies within the same industry have the same earnings yield but one company's stock is priced higher, it might indicate that the market views the company with the higher stock price as having better growth prospects.
In summary, earning yield is a financial ratio that measures a company's profitability in relation to its stock price. It provides an indication of the return that an investor can expect to receive on their investment in the company's stock. There are different types of earning yields, such as trailing, forward, and expected. It can be used by investors to compare the profitability of different companies and make investment decisions. However, it's important to consider other financial metrics when making investment decisions.
