Explain earnings yield (E/P) and argue for its use
The idea
Earnings yield, E ÷ P, is the reciprocal of the P/E ratio. It is useful when earnings are negative or close to zero: a P/E becomes meaningless or enormous, while earnings yield stays a continuous number that can be ranked, a negative yield simply sitting below a positive one. For this reason analysts ranking shares on value often sort by earnings yield from highest, the cheapest, to lowest. Earnings yield can also be compared with bond yields as a rough indicator of relative value. The trap is ranking on P/E when some companies have losses, which places a loss-maker with a negative P/E at the top of the list as if it were the cheapest share.
In the app: 1 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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