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Definition

In his book, “The Little That Beat the Market,” hedge fund manager Joel Greenblatt defines Earnings Yield as:

Earnings Yield = Operating Income / Enterprise Value

Formula

Earnings Yield = Operating Income / Enterprise Value

Explanation

Joel Greenblatt defines the earnings yield using the above equation because it more accurately reflects the company’s profitability relative to its stock price. Items like interest payment and tax etc. are not directly related to the company’s operational profitability.

Enterprise Value instead of market cap (share price) is used in the calculation because it is the real price stock and bond investors together pay for the company.

Beaware

Joel Greenblatt’s definition of earnings yield has the same problems the regular earnings yield does. It does not consider the growth of the company. It only looks at one-year’s business operation. For cyclical companies, the earnings yield is usually highest at the peak of the business cycle. But these earnings are rarely sustainable.

Forward Rate of Return based on Don Yacktman’s definition is a better measure of the expected rate of return for a stock.

Related Terms

Operating Income, Enterprise Value, Earnings Yield, Forward Rate of Return

Financial Dictionary

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