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The earnings yield is an indication of how much return shareholders investment in the company earned over the past 12 months. The higher the earnings yield is, the better.
As of today, the stock price of Southwest Airlines Co is $32.51. Southwest Airlines Co's earnings per share for the trailing twelve months (TTM) ended in Mar. 2015 was $2.09. Therefore, Southwest Airlines Co's earnings yield of today is 6.42%.
The earnings yield does not consider the growth of the business. A better indicator of the attractiveness of an investment which takes growth into account is the Forward Rate of Return. Southwest Airlines Co's Forward Rate of Return for the quarter that ended in Mar. 2015 was 26.23%. The Forward Rate of Return uses the normalized Free Cash Flow of the past seven years, and considers growth. The forward rate of return can be thought of as the return that investors buying the stock today can expect from it in the future.
Earnings yield is the reciprocal of the P/E Ratio.
Southwest Airlines Co's Earnings Yield for today is calculated as
|Earnings Yield||=||Earnings Per Share (TTM)||/||Share Price|
Southwest Airlines Co's Earnings per Share for the trailing twelve months (TTM) ended in Mar. 2015 was 0.67 (Jun. 2014 ) + 0.48 (Sep. 2014 ) + 0.277 (Dec. 2014 ) + 0.66 (Mar. 2015 ) = $2.087 Mil.
* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.
It can also be calculated from the numbers for the whole company:
The earnings in the calculation is the Trailing Twelve Months earnings.
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 shareholders 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.
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.