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Basic Question 5 of 7
Which of the following statements is the LEAST ACCURATE with respect to the use of earnings yield (E/P)?
II. When ranking stocks in terms of valuation, E/P may be used even if earnings are negative for certain firms.
III. Earnings yield can be positive even when earnings are negative.
IV. A high earnings yield would be preferred, holding everything else constant.
I. Earnings yield should increase as the P/E ratio decreases for a stock.
II. When ranking stocks in terms of valuation, E/P may be used even if earnings are negative for certain firms.
III. Earnings yield can be positive even when earnings are negative.
IV. A high earnings yield would be preferred, holding everything else constant.
User Contributed Comments 7
| User | Comment |
|---|---|
| danlan2 | Is II correct? |
| mdags | Re: II => E/P maintains high-to-low rank even when comparing firms w/ negative earnings. P/E does not. |
| ikaneng | IV: why would it be preferred? |
| JimM | ikaneng -- high earnings yield is preferred because you get more bang for your investment dollar, a bigger claim on earnings. |
| Tony1234 | E/P is the inverse of P/E. low P/Es are a sign of a stock being relatively undervalued. therefore a High E/P is also a sign of a stock being relatively undervalued. |
| past1sttime | 1 should be false if earnings r negative earnings yield will not increase and the pe ratio will decrease |
| oregan | you should assume they are all positive by default. |
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Edward Liu
Learning Outcome Statements
calculate and interpret alternative price multiples and dividend yield;
calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS;
explain and justify the use of earnings yield (E/P);
describe fundamental factors that influence alternative price multiples and dividend yield;
calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals;
calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology;
evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables;
calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation;
calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model;
explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition;
calculate and interpret EV multiples and evaluate the use of EV/EBITDA;
CFA® 2025 Level II Curriculum, Volume 4, Module 23.