Financial Education

The earnings yield is a company’s earnings per share divided by its price per share. Earnings yield has frequently been used to predict real return for stocks. Since earnings are not reported on a real basis, Stephen Wilcox presented a technique in the September/October 2007 Financial Analysts Journal to adjust earnings yield to better represent real return. Statistical tests show that this measure better predicts future real returns than other popular valuation measures.

There are two primary adjustments considered:

• An accounting adjustment to convert historical cost measures to current value
• An adjustment to liabilities to reflect the real cost of capital as principal values erode due to inflation

For more information, see all articles on: Fundamental Analysis, Investing in Stocks, Investment Returns, Ratio Analysis, Research, Valuation

See also:

Yield Elasticity

The Gordon Growth Model Estimate of Equity Risk Premium

High Yield Bond Returns: Downgrades versus Original Issues

What is a Stock Worth? Part 3 – Sources of Cash Flows

Standardized Unexpected Earnings (SUE)