Understanding Earnings Yield Ratio
Earnings Yield Ratio indicates the percentage of profit the company earned per share. This metric is inverse of the PE Ratio. That means Earning yield is calculated by dividing EPS by Current Price. And by multiplying Price-to-Earnings Ratio with Earnings Yield, the answer we get will be one. Earnings Yield shows whether a company is correctly valued or not. It makes the comparison of different investments easier. If we want to compare the 'yield' of different investments then Earning yield ratio is more useful than any other ratio like the PE ratio.
The formula to derive Earnings Yield Ratio
Earnings Per Share (EPS) - EPS is a measure of the company's profits available for the shareholders on a per share basis and calculated by dividing the Net Income by Weighted Share Outstanding. EPS is found in the company's Income Statement.
Current Price - It is the most recent selling price of stocks. The current price indicates the current value of the stocks, and it is also known as market value.
Example of Earnings Yield: For the financial year, 20 Microns reported EPS (Earnings Per Share) as Rs.6.51 and the Current price of the company as 60.05
The value as per the formula [Earning Yield = (EPS / Current Price) x 100] is calculated as (6.51 / 60.05) x 100 = 10.84%.
Key Highlights
Earnings Yield indicates whether the company is undervalued or overvalued. It shows investors how much yield they will receive.
Earnings Yield is the inverse of the Price to Earnings (PE) Ratio. And it is measured by dividing earnings per share by current stock price.
A high Earnings Yield ratio is considered good.
Comparing the Earnings Yield Ratio with peers can give a good idea of which stock is better for long-term investment.
While looking at the Earnings Yield, the following points should also take into consideration:
A Higher Earning Yield ratio is considered good. It indicates that the company's undervalued. But also keep in mind, it can also be due to the market price per share may be low.
A lower Earnings Yield ratio is considered as the company's stock is overvalued.
This metric shows investors how much yield they will receive.
This valuation metric is not just useful to compare stocks, but it can be used in other investments. Generally, the Earnings Yield of treasury bonds is lower than the earnings yields of equities.
As we mention above Earnings Yield is the inverse of the PE ratio. It shows the same thing but in a different way. The price to Earnings (PE) ratio is calculated by dividing the current price by EPS, and the Earnings Yield is calculated as EPS divided by the current price. PE Ratio indicates how many times investors pay money to get 1 rupee of return. And Earnings Yield indicates the percentage of profit the company earned per share relative to its stock price.
How to use Earning Yield effectively
Investors should look for a high ratio. The Earnings Yield ratio of 4% or higher is considered good. As it indicates the company is generating high Earnings per share from every rupee invested in the company's share.
The earnings Yield ratio is not widely used as PE Ratio but is more helpful to investors when they have concerns regarding how much they will get the return on their investment.
Comparing the Earnings Yield Ratio with peers can give a good idea of which stock is better for long-term investment.
For better understanding and the analysis, we should check other financial metrics with Earnings Yield like
PE ratio,
PB ratio,
Net Margin, etc.,
Range |
Indicator |
Comments |
Above 10 |
Strong Bullish |
Extremely Undervalued |
8 to 10 |
Bullish |
Highly Undervalued |
6 to 8 |
Mild Bullish |
Undervalued |
4 to 6 |
Neutral |
Rightly Valued |
3 to 4 |
Mild Bearish |
Overvalued |
2 to 3 |
Bearish |
Highly Overvalued |
0 to 2 |
Strong Bearish |
Extremely Overvalued |