Earnings yield is the inverse of P/E ( 1/x )
So Earnings yield of 15 P/E is 0.0667... as you mentioned.
The more I think about it and look at it the more I think this is all bullshit.
They are nothing more than headline numbers, like EBITDA, they really hide what you need to look at and know.
They are simply an expression of the underlying inputs with limited utility.
A good example of this would be Kw / Horsepower.
Such an overused and overquoted headline figure that means almost nothing if you don't ask the right questions.....
To begin with Kw is not a "real" force.... it's an expression of a formula..
P
(kW) = 0.105* T
(Nm)*N
(rpm) / 1000
The key here is that
Torque is the real unit of power.
Kw is a factor of Torque at RPM.
A motor with 10Nm is just as powerfull as another motor with 10Nm.
BUT.... if one motor makes that power at 10,000RPM and another make that power at 1,000RPM then you will see a waaaaay different expression of Kw.
And any person that then just looks at the high headline Kw figure will think one motor is a more powerfull motor when in fact it is not.
In a real world practical example, depending on application, gearing and torque curve, the 1,000RPM motor could far outperform the 10,000RPM motor.
Similarly here.
P/E is usefull how exactly?... it's not a real thing... it's simply an expression.
P/E Ratio = Earnings per share / Market value per shareMarket value again is an input into the decision but not the main thing...... is $10 price worth it or not.... well that depend on other things besides the price and the price can fluctuate wildly based on market whim..... that does NOT make the company a better or more profitable company.
Earnings per share.... mmmm once again a loaded input.... this is net profit. so many ways this gets manipulated - should you then actually trust this as a performance measure when it's almost an accounting number?
And with that manipulation the P/E changes.
I'm thinking you need to look at other items...not P/E.... the P/E just expresses the underlying items in a skewed way for the chosen timeframe.
What seems most important is the real stuff underlying it all.
- cash flow / free cash flow.
- earnings growth potential
- economic moat / risks
At P/E 15.... that is just 6.67% earnings yield....is that really worth the risk in capital??
Not so sure....
The only way it works out is that the earnings grow every year, with it the market price should follow suit... thus the rolling 12 month window "P/E" remains 15 sure.... but the
earnings growth could have changed dramatically is what was important ....
If the company does not have good cashflow to work with and cannot grow earnings then it won't go anywhere.
I'm still working this out in my head......
my 2cents.....
