Keep an eye on the earning yield of equity vs bonds
Earnings Yield = Earnings per share divided by the stock price
If earnings per share for the past four quarters = Rs 3 and the stock price = Rs 30, the earnings yield is 10 per cent.
The earnings yield is the reciprocal of the price-to-earnings ratio, which would be 30/3, or 10. A high earnings yield indicates that the market is assuming a lower growth in profits in the future for the company while a low earnings yield indicates that the company is expected (by the market) to have high profit growth for an extended period of time. An expectation of low profitability in the future has a better probability of being exceeded compared to the stock where the expectations are high. The methodology used to calculate the earnings yield of a stock can be extended to calculate the earnings yield of an index.
Similarly, for the other capital instrument available for investors - bonds - yields are readily available and indicate the returns that they will provide to investors who continue to hold the bond till maturity. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When
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