What is Earnings Yield?
An estimate return, you earn from an investment is called Earnings Yield.
Formula to Calculate Earnings Yield
Earnings Yield = ( EPS ÷ Price ) ☓ 100 or
Earnings Yield = 1 ÷ PE Ratio
Example of Earnings Yield
|Cost of House||20,00,000|
|Yearly Rent from House||1,20,000|
|Earnings Yield of House||6%|
Another Example of Earnings Yield
EPS of Car Loan Insurance Company is 100 and its closing share price today is 1000.
Earnings Yield = (100 ÷ 1000) ☓ 100 = 0.10 ☓ 100 = 10%
Earnings Yield of Different Assets
|Investment Options||Earnings Yield|
|Idle Savings Bank Account||4%|
|Car Loan Insurance Company||10%|
Moral of the Story (Warren Buffett)
In doing that, we always mentally compare any move we are contemplating with dozens of other opportunities open to us, including the purchase of small pieces of the best businesses in the world via the stock market.