Tata Motors
Earning yield is a great financial ratio which can be used very effectively to evaluate a stock. The process of calculating this ratio is very simple, first calculate the ‘Earning per share (EPS) and then divide EPS with current market price of stock. The value you will obtain is in percentage. The reported net profit (PAT) as declared by the company in last 12 months of operation can be taken as earning. Number of shares outstanding in the market is also declared by companies in their financial reports. So collect these two values and calculate EPS.
Any investor who has been into share market investing must have come across Price to Earning (P/E) ratio in the past. Earning Yield is just an inverse of the famous P/E ratio. As an investor one would like to see a higher earning yield in order to decide whether to buy this share or not. In the above example you will see that Company A has a earning yield of 6.6% where as Company B has a yield of 12.5%, hence Company B certainly becomes a better buy. | PAT | No of Shares Outstanding | EPS | Market Price | Earning Yield | Company A | $100 | 10 Nos | $10 | $150 | 6.6% | Company B | $150 | 10 Nos | $15 | $120 | 12.5% |
The significance of using Earning Yield to evaluate a share is that it helps investors to know whether a share is over valued or are available at a bargain price. In the above example, Company A has earning yield of 6.6% and Company B has 12.5%, what does it mean to an investor. In order to answer this question, one should know a third comparing percentage called as “risk free return” of the market. Generally speaking this risk free return in nothing but the returns that investors have access to in the form of Government Bonds, Bank Deposits etc. Suppose that the present levels of “risk free returns” is 7.5%, which means that as an investors you have a choice to invest in (say) a bank deposit which will give a risk free return of 7.5%. But Company A is showing an earning yield of only 6.6% which is
Any investor who has been into share market investing must have come across Price to Earning (P/E) ratio in the past. Earning Yield is just an inverse of the famous P/E ratio. As an investor one would like to see a higher earning yield in order to decide whether to buy this share or not. In the above example you will see that Company A has a earning yield of 6.6% where as Company B has a yield of 12.5%, hence Company B certainly becomes a better buy. | PAT | No of Shares Outstanding | EPS | Market Price | Earning Yield | Company A | $100 | 10 Nos | $10 | $150 | 6.6% | Company B | $150 | 10 Nos | $15 | $120 | 12.5% |
The significance of using Earning Yield to evaluate a share is that it helps investors to know whether a share is over valued or are available at a bargain price. In the above example, Company A has earning yield of 6.6% and Company B has 12.5%, what does it mean to an investor. In order to answer this question, one should know a third comparing percentage called as “risk free return” of the market. Generally speaking this risk free return in nothing but the returns that investors have access to in the form of Government Bonds, Bank Deposits etc. Suppose that the present levels of “risk free returns” is 7.5%, which means that as an investors you have a choice to invest in (say) a bank deposit which will give a risk free return of 7.5%. But Company A is showing an earning yield of only 6.6% which is