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How to calculate earnings from the stock market

Publish Date: June 10, 2019

By: Sandhya Kannan, Head – Content

Traders use several ratios to analyse the valuation of stocks. These include earnings per share, price to earnings, enterprise value, and so on. But these may not give your earnings from the share market. For that, you may need to use another ratio—the earnings yield ratio.

What is earnings yield?

Earnings yield is the inverse of price to earnings (PE). If PE is 10, then the earnings yield would be 1/10. In percentage terms, the earnings yield would be 10%.

A few quick checks will show you that lower PEs result in higher earnings yields.

You can also find it by dividing the earnings per share by the current price of a share. In the above example, if Rs 10,000 is invested, the earnings will be Rs 1,000.

Related: How to generate regular income from short-term investments

What is the importance of earnings yield?

You can use earnings yield to compare earnings from investments in government securities, bank fixed deposits, and the like. Suppose you are earning 7% on government securities. You could earn more than this amount when investing in stocks.

Let’s cite an example. If the PE ratio is 10, your earnings would be 10% in the stock market. This is 3% more than what you have been earning from other investments. If the PE ratio is 7, the earnings would be 7.1% more. This difference is the risk premium.

Related: Is negative price to earnings a bad sign for investors?

Where can it go wrong?

Earnings yield does not cover factors like future growth, business prospects, sectoral factors, and performance of the overall economy. These need to be analysed separately. It’s also important not to confuse dividend yield with earnings yield.

Related: How to profit in a bear market

Summing up

You may get a clearer idea about stock movements if you follow the share market live. Earnings yield is the best way to calculate earnings from the market. It could help you to take more calculated and tactical investment decisions in future.

While you’re at it, open an account with Kotak Securities. You will get investment guidance from industry experts along with up-to-date market reports and research.

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