Explanation
If the P/E ratio is an indication of how many years it takes for the company to earn back the stock price shareholders pay to buy the shares, the earnings yield is an indication of how much return shareholdersÂ’ investment in the company earned over the past 12 months. The higher the earnings yield is, the better.
If a company loses money, the earnings yield is negative. This gives a more straightforward indication that the company is losing money. This is an advantage of using earnings yield instead of the P/E ratio in valuation. For valuation purposes, the P/B Ratio and the P/S Ratio should be used for companies that are losing money.
Like the P/E ratio, the earnings yield can be used to compare investments in different industries. It can even be used to compare the attractiveness of different asset classes such as bonds and cash. Of course, the earnings yield should not be the only factor in deciding which asset classes to invest.
Also similar to the P/E ratio, the earnings yield does not consider the growth of the business. A growing company with the same earnings yield should be more attractive than a company that has the same earnings yield but does not grow.
A better indicator of the attractiveness of an investment which takes growth into account is the Forward Rate of Return.
Beaware
Just like the P/E Ratio, non-recurring items such as selling part of the business, selling a previous investment, etc., can affect earnings yield dramatically. The earning yield is also a poor indication for cyclical companies. When a cyclical stock has a high earnings yield it is usually at the peak of its cycle.
Related Terms
P/E Ratio,
Earnings Yield (Joel Greenblatt),
Forward Rate of Return?
Market Cap,
Net Income* All numbers are in millions except for per share dataKEYW Holding Corp Annual Data
| Dec09 | Dec10 | Dec11 | Dec12 |
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| Earnings Yield |
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KEYW Holding Corp Quarterly Data
| Dec10 | Mar11 | Jun11 | Sep11 | Dec11 | Mar12 | Jun12 | Sep12 | Dec12 | Mar13 |
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| Earnings Yield |
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European Shorting
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