Listen to a Business English Dialogue About Earnings yield
Sophia: Hi Ella, have you heard of “earnings yield” in finance?
Ella: No, I haven’t. What is it?
Sophia: Earnings yield is a financial metric that measures the earnings generated by a company relative to its stock price, calculated by dividing earnings per share by the current stock price and expressing the result as a percentage.
Ella: Oh, I see. So, it’s like the inverse of the price-to-earnings ratio?
Sophia: Exactly. A higher earnings yield indicates that a company’s earnings are relatively high compared to its stock price, making it potentially more attractive to investors.
Ella: That sounds important. How do investors use earnings yield in their analysis?
Sophia: Investors may use earnings yield as a valuation tool to compare the relative attractiveness of different stocks or to assess whether a stock is undervalued or overvalued compared to its earnings potential.
Ella: I see. Are there any limitations to using earnings yield?
Sophia: One limitation is that earnings yield does not account for factors like growth prospects, dividend payments, or the overall quality of earnings, so it should be used in conjunction with other financial metrics for a more comprehensive analysis.
Ella: Got it. How is earnings yield different from dividend yield?
Sophia: While earnings yield measures earnings relative to stock price, dividend yield measures dividends relative to stock price, indicating the percentage of dividends paid out to shareholders each year.
Ella: Thanks for explaining, Sophia. Earnings yield seems like a useful metric for evaluating investment opportunities.
Sophia: You’re welcome, Ella. It’s a handy tool for investors to gauge the profitability and potential returns of stocks.