How to Calculate Earnings Yield

Earnings yield is a company's earnings per share divided by the current market price per share. It is the reciprocal of the price to earnings ratio. The higher the earnings yield the more undervalued a stock is.

Learn how to calculate the earnings yield with the following examples:

Example 1:
If a stock currently has a P/E ratio of 5, it would have an earnings yield of: 1/5 = 20%

Example 2:
Marcus Ltd has the following information:
Ordinary shares of $0.50 each: $600,000
10% Preference shares of $0.50 each: $500,000
12% Loan stock $180,000
Net profit after tax $700,000
Ordinary share dividends $45,000
Preference share dividends $50,000
Price per ordinary share $2.00

Then,
Number of ordinary shares = $600,000 / $0.50 = 1,200,000
EPS = (Net profit – Preferred dividends) / No. of shares = (700,000 - 50,000) / 1,200,000 = $0.54
Earnings Yield = (Earnings per share / Market price per share) * 100% = (0.54 / 2) * 100% = 27%

* Next: How to Calculate Price Earnings Ratio
0 comments: