Earnings yield

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Earning yield is the quotient of

.

The earning yield is quoted as a percentage, and therefore allows immediate comparison to prevailing long-term interest rates (e.g. the Fed model).

Applications

The earning yield can be used to compare the earnings of a specific company or group of companies across different sectors and industries against bond yields. Generally, the earnings yields of equities are higher than the yield of risk-free

] which equates to an earnings yield of over 7%.

The Fed model is an example of a system that uses the earnings yield as a method to assess aggregate stock market valuation levels, although it is disputed.^[2]

Adjusted versions

Earning yield is one of the factors discussed in

. However, Greenblatt uses an adjusted earning yield formula to account for the fact that different companies have different debt levels and tax rates.

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 the Earning 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 carrying much debt and rewarding those having much cash.^[3]

See also

• Dividend yield
• Fed model

References