On this page is an earnings yield calculator. Enter a company's annual earnings and price per share, or total earnings and current market cap to compute a company's earnings yield.
Earnings Yield Calculator
What is an earnings yield?
A company's earnings yield is the percentage of a total investment that the company pays out in earnings per year. The earnings yield is akin to the dividend yield if the company pays out all earnings to investors as dividends.
The inverse of the earnings yield is the price-to-earnings ratio. The earnings yield is better in some situations to compare to interest rates or other yields, such as the dividend yield mentioned above.
Earnings Yield Formula
The earnings yield formula is:
earnings\ yield=\frac{earnings}{price}
Where:
- Earnings - the earnings of a share of a company over 12 months.
- Price - the current trading price of a share of a company, or alternatively, the total market cap.
And earnings yield is generally expressed as a percentage.
Limitations on Earnings Yield
The limitations of earnings yield match the limitations on price-to-earnings ratios. For a full discussion, read through that page, but briefly:
- Price – price is quoted for a share of a company, but the entire capital stack may include other classes of shares as well as senior debt which would have priority in a liquidation.
- Earnings – while earnings are a particular interpretation of earnings generally following GAAP or IFRS principles, they don't necessarily capture a company's earnings power and a measure like EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or some cash flow measure may be better.
- Omitted factors – the PE ratio doesn't account for earnings growth, for example, like the PEG or Price to Earnings Growth Ratio. Early-stage companies may have no earnings yet, and other ratios like the Price to Sales or Price to Growth Profit ratio may be more appropriate. Additionally, capturing a market may be more important than earnings now; current earnings aren't the only economically viable reason to own a company.
- Business cycle and rate environment - PE ratios and earnings yields are decent relative valuation tools, but are affected quite a bit by the prevailing interest rates (through alternative places for money and cost of capital), the global business cycle and cost of talent and services, and the stage of the company's growth.
In that post, I suggested a Discounted Cash Flow (DCF) model can account for all of these factors (and more!) – but beware of your own biases and optimism or pessimism.
For an alternate view on the limitations of price to earnings (and, by definition, earnings yields), try Expectations Investing by Michael Mauboussin or One Up on Wall Street by Peter Lynch.
