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Earnings Yield

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The earnings yield is earnings per share divided by the stock price. In the earnings yield computation, trailing 12-month earnings is typically used. For example, if earnings per share for the past four quarters is $3 and the stock price is $30, the earnings yield is 10%. The earnings yield is the reciprocal of the price to earnings ratio, which would be 30/3, or 10. Inverse to the P/E, a high earnings yield might indicate a stock is undervalued, and a low earnings yield might indicate a stock is overvalued. Some market pros use earnings yield instead of P/E, because they find a percentage indicator clearer. Moreover, because earnings yield is expressed as a percentage, it can be compared to the yield on other investments, like bonds. But be cautious of simplistic uses of the earnings yield. A stock's value reflects the return for all future periods (appropriately discounted), not just that for a single year. Moreover, growth stocks with strong potential but few earnings will have a very low earnings yield, yet may not be overvalued.



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