If the P/E ratio is an indication of how many years it takes for
the company to earn back the stock price shareholders pay to buy
the shares, the earnings yield is an indication of how much
return shareholders investment in the company earned over the
past 12 months. The higher the earnings yield is, the better. If
a company loses money, the earnings yield is negative. This
gives a more straightforward indication that the company is
losing money. This is an advantage of using earnings yield
instead of the P/E ratio in valuation. For valuation purposes,
the P/B Ratio and the P/S Ratio should be used for companies
that are losing money. Like the P/E ratio, the earnings yield
can be used to compare investments in different industries. It
can even be used to compare the attractiveness of different
asset classes such as bonds and cash. Of course, the earnings
yield should not be the only factor in deciding which asset
classes to invest. Also similar to the P/E ratio, the earnings
yield does not consider the growth