Earnings Yield

Earnings yield is a measure of return on investment used primarily by analysts and investors to understand the relationship between a company’s net income and its market value. It is calculated by dividing the company’s net income by its market capitalization and expressed as a percentage.

Formula:

Earnings Yield = Net Income/Market Capitalization X 100%

Components:

• Net Income: The total amount of money a company earns from its operations after subtracting cost of goods sold and depreciation.
• Market Capitalization: The total market value of a company’s outstanding stock. This is calculated by multiplying the number of shares outstanding by the current market price per share.

Interpretation:

• Earnings yield measures the company’s ability to generate returns on investment for shareholders.
• Investors use earnings yield to compare different companies and assess their relative profitability.
• A high earnings yield indicates that the company is generating high returns on investment, which can be attractive to investors.
• A low earnings yield indicates that the company is not generating high returns on investment, which can be less attractive to investors.

Additional Notes:

• Earnings yield is used primarily for companies with positive net income.
• Earnings yield is more relevant for comparing companies in the same industry or with similar business models.
• Over time, earnings yield can fluctuate based on market conditions and changes in the company’s financial performance.

Example:

A company has a market capitalization of $10 million and a net income of $2 million. Its earnings yield would be:

Earnings Yield = $2 million/($10 million) X 100% = 20%

This indicates that the company is generating a 20% return on investment.