Search


Subscribe to AFM


Subscribe to AllFinancialMatters
by Email

All Financial Matters

Promote Your Page Too

The American's Creed

Site Sponsors

AFM in the Media


Money Magazine May 2008

Real Simple March 2008

Blogroll (Daily Reads)

« | Main | »

What’s an Earnings Yield?

By JLP | March 10, 2006

In his book, The Little Book That Beats the Market, Joel Greenblatt talks about a company’s earnings yield. Most of us are familiar with the P/E ratio which is simply the share price divided by earnings per share. The P/E ratio tells us how much we are paying for each dollar’s worth of earnings. So, if a company has a P/E of 10, we are essentially paying $10 for $1 worth of earnings.

The earnings yield is simply the earnings per share divided by the price per share or the INVERSE of the P/E ratio. So, if a company has a P/E of 10, we can take the inverse of 10 (which is the 1/x key on a calculator or simply 1 ÷ 10 which equals .10 or 10%). Joel Greenblatt likes to compare a company’s earnings yield with the yield on fixed income investments so that investors get an idea of how much they are paying for a stock. Of course comparing a stock’s earnings yield to the yield on a bond can be dangerous because bonds are typically less “risky” than stocks. When you buy a high quality bond with a particular yield, you stand a good chance of getting that yield until the bond matures. With stocks, there are no guarantees. A company’s earnings per share can jump all over the place.

Anyway, it is an interesting way to look at stocks. The higher the earnings yield the more undervalued a stock looks. WARNING: A high earnings yield is only a starting point for looking at stocks.

Topics: Investing | No Comments »


Comments