Value Factors
The standard definition of earnings yield is the earnings per share divided by the price of a share. It's the inverse of P/E and shows the amount of money earned compared to the price you pay for a share.
Our earnings yield is slightly different and aligns with what Joel Greenblatt uses. As numerators, we use Operating income, aka EBIT. As Joel explains:
By using EBIT (which looks at actual operating earnings before interest expense and taxes) and comparing it to enterprise value, we can calculate the pretax earnings yield on the full purchase price of a business (i.e., pretax operating earnings relative to the price of equity plus any debt assumed). This allows us to put companies with different debt levels and tax rates on an equal footing when comparing earnings yields.
As denominator, we use Enterprise Value (EV) as it takes into account both the price paid for an equity stake in the business as well as the debt financing used to help generate operating earnings.
We calculate the Earnings Yield as follows:
While Greenblatt's magic formula combines earnings yield with the quality ratio ROIC, a more recent study concluded that the formula derives all its magic from Earnings Yield and none from ROIC. According to Gray and Carlisle, a portfolio of stocks sorted only on the cheapness metric achieves an astounding return of 15.95% annually. It outperforms the twometric magic formula by more than 2% per year.
In the scorecard, we show the Earnings Yield for the selected stock. We also calculate the median Earnings Yield for all stocks, the company's sector, industry group, and industry. Finally, we include the percentile to compare a company to its peers easily. For more information, click here.
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