Earnings yield

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Earnings yield is the quotient of earnings per share divided by the share price. [1] It is the reciprocal of the P/E ratio.

Earnings per share EPS

Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company.

A share price is the price of a single share of a number of saleable stocks of a company, derivative or other financial asset. In layman's terms, the stock price is the highest amount someone is willing to pay for the stock, or the lowest amount that it can be bought for.

Contents

The earnings yield is quoted as a percentage, allowing an easy comparison to going bond rates.

Applications

The earnings yield can be used to compare the earnings of a stock, sector or the whole market against bond yields. Generally, the earnings yields of equities are higher than the yield of risk-free treasury bonds. Some of this may result in dividends, while some may be kept as retained earnings. The market price of stocks may increase or decrease, reflecting the additional risk involved in equity investments. The average P/E ratio for U.S. stocks from 1900 to 2005 is 14,[ citation needed ] which equates to an earnings yield of over 7%.

Stock financial instrument

The stock of a corporation is all of the shares into which ownership of the corporation is divided. In American English, the shares are commonly known as "stocks." A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

Stock market public entity for the trading of company stocks and shares

A stock market, equity market or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately. Examples of the latter include shares of private companies which are sold to investors through equity crowdfunding platforms. Stock exchanges list shares of common equity as well as other security types, e.g. corporate bonds and convertible bonds.

Adjusted versions

Earnings yield is one of the factors discussed in Joel Greenblatt's The Little Book That Beats the Market . However, Greenblatt uses an adjusted earnings yield formula to account for the fact that different companies have different debt levels and tax rates.

Joel Greenblatt is an American academic, hedge fund manager, investor, and writer. He is a value investor, and adjunct professor at the Columbia University Graduate School of Business. He runs Gotham Funds with his partner, Robert Goldstein. He is the former chairman of the board of Alliant Techsystems and founder of the New York Securities Auction Corporation. He is also a director at Pzena Investment Management, a high-end value firm.

Earnings Yield = (Earnings Before Interest & Taxes + Depreciation – CapEx) / Enterprise Value (Market Value + Debt – Cash)

This tells you how expensive a company is in relation to the earnings the company generates. When looking at Earnings Yield, we make certain adjustments to a company’s market capitalization to estimate what it would take to buy the entire company. This involves penalizing companies that have a lot of debt and rewarding others that have a lot of cash. [2]

See also

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Convertible bond

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The following outline is provided as an overview of and topical guide to finance:

Financial ratio characteristic number

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