The earnings yield is a financial ratio that depicts the earnings per share for the most recent 12-month period divided by the current market price per share. It’s essentially a measure of the return on investment for a company’s stock, expressed as a percentage. Unlike the price-to-earnings (P/E) ratio, the earnings yield is a direct measure of the percentage return on the investment. Higher yields are often seen as a sign of lower risk and greater income potential, but they can also suggest that the market has a weak expectation for future growth.
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1. How is the earnings yield different from the dividend yield?
The earnings yield shows the percentage of a company’s earnings per share, while the dividend yield only considers the actual cash dividends distributed to shareholders. This means that earnings yield can include retained earnings which are often reinvested into the business, not just distributed dividends.
2. Is a higher earnings yield always better?
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Not necessarily. A higher earnings yield means the company is generating a high income relative to its share price, but it might also indicate that the market expects slow future growth or that the stock’s price is undervalued.
3. How does the earnings yield affect investment decisions?
Investors can use the earnings yield to compare the profitability of different investments and choose those that offer the best potential return. Investors tend to prefer stocks that offer high earnings yields.
4. How does a company increase its earnings yield?
A company can increase its earnings yield by increasing its earnings per share or by decreasing its stock price. However, decreasing the stock price often leads to a loss of market confidence.
5. Does a negative earnings yield mean a company is in trouble?
A negative earnings yield means the company is not currently profitable. While it could be a warning sign, many start-ups and high-growth companies operate at a loss initially but can become highly profitable in the long run.