Earnings yield is a measure of the profitability of a company, calculated as the company’s earnings per share (EPS) divided by its current stock price. It is the inverse of the price-to-earnings (P/E) ratio. It’s a way to evaluate the relative value of a stock by comparing its earnings to its market price.
The earnings yield is expressed as a percentage, and it represents the amount of earnings the company is generating for each pound of market capitalisation. A higher earnings yield indicates that the company is generating more earnings for each pound of market capitalisation, and therefore may be considered a better value.
Earnings yield can be used to compare the profitability of different companies in the same industry or sector. For example, if Company A has an earnings yield of 6%, and Company B has an earnings yield of 4%, Company A may be considered a better value.
It can also be used to compare the profitability of a company to the broader market. The average earnings yield of the S&P 500 is around 5%, so if a company has an earnings yield of 6%, it may be considered a better value than the broader market.
It’s important to note that Earnings yield is affected by the company’s earnings growth rate, a company with a high earnings yield but a low earnings growth rate might not be as attractive as a company with a lower earnings yield but a high growth rate. Also, Earnings yield doesn’t take into account the company’s debt, which can affect the company’s ability to generate earnings in the future.
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