The earnings yield ratio is an effective restatement of the price-earnings ratio. It shows earnings per share as a percentage of the market value of the ordinary share.

Earnings yield is calculated by dividing the earnings per share (EPS) for the last 12 months by the current market value of the share and multiplying the result by 100.

Formula

Earnings Yield Ratio Formula

Example

If a company has an earnings per share (EPS) ratio of 2.8 and its shares trade at $56 per share, the earnings yield ratio is (2.8/56) × 100 = 5%.

The earnings yield ratio is 5%. This means that the company’s EPS during the last 12 months was 5% of the current market value of its ordinary shares.

Frequently Asked Questions

What does the earnings yield ratio show?

The Earnings Yield Ratio shows how much of a return an investor could potentially receive from holding the company’s shares, in relation to its current share price.

How is it calculated?

The earnings per share is divided by the market value of the ordinary shares and multiplied by 100.

How do I interpret the earnings yield ratio?

It is useful to compare the Earnings Yield Ratio with those of similar companies and the market in general. High Earnings Yield Ratios may suggest that a company is undervalued, while low ratios might mean than an individual share or the whole market is overvalued.

Does the earnings yield ratio vary by country?

The principles of calculating an Earnings Yield Ratio are consistent worldwide, although it will be expressed differently depending on the accounting framework used.

Is it appropriate to use the earnings yield ratio for all companies?

The Earnings Yield Ratio is most useful when comparing like with like, i.E. Firms in similar sectors and of a similar size. We also need to be aware that certain industries are more cyclical than others. The riskier an industry, the higher the Earnings Yield Ratio could be.

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