earnings-price ratio

(redirected from Earnings-Price Ratios)

Earnings-price ratio

Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Earnings-Price Ratio

The annual earnings of a security per share at a given time divided into its price per share. It is the inverse of the more common price-earnings ratio. Often, the earnings one uses are trailing 12-month earnings, but some analysts use other forms. The earnings-price ratio is a way to help determine a security's stock valuation, that is, the fair value of a stock in a perfect market. It is also a measure of expected, but not realized, growth. It may be used in place of the price-earnings ratio if, say, there are no earnings (as one cannot divide by zero). It is also called the earnings yield or the earnings capitalization ratio.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

earnings-price ratio (E/P ratio)

A measure indicating the rate at which investors will capitalize a firm's expected earnings in the coming period. This ratio is calculated by dividing the projected earnings per share by the current market price of the stock. A relatively low E/P ratio anticipates higher-than-average growth in earnings. Earnings-price ratio is the inverse of the price-earnings ratio. Also called earnings capitalization rate, earnings yield.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
Earnings-price ratios based on prices at end of quarter.
Economists have suggested a whole range of variables that predict the equity premium: dividend price ratios, dividend yields, earnings-price ratios, dividend payout ratios, corporate or net issuing ratios, book-market ratios, beta premia, interest rates (in various guises), and consumption-based macroeconomic ratios (cay).
Inventory accounting methods and earnings-price ratios. Contemporary Accounting Research (Fall): 419-436.
Clearly, neither Campbell and Shiller's writings, nor Shiller's book, nor actual earnings-price ratios have made much of a dent in the optimism of finance professors.
Relationship of Earnings-Price Ratios to the Prospective Real Return on Equities
The basic assumption in this analysis is that the earnings-price ratio is a reasonable estimate of the forward-looking real return on equities, (13) where this is defined as the expected total return per share (dividends plus capital gains) corrected for movements in the general price level.
This criterion is needed to calculate meaningful earnings-price ratios (See Banz and Breen, 1986).
[EP.sub.jt] = earnings-price ratio for firm j, period t; and
The ten-year average earnings-price ratio (EP) is used as the empirical proxy for the firm's growth opportunities.(17) The earnings-price ratio rather than the price-earnings ratio is used in order to reduce the possible distortion in the proxy measure when the firm experiences a temporary decline in earning that is close to zero or negative.(18) The following two definitions of EP are employed:
(18) When the firm experiences a temporary decline in earning that is close to zero or negative, price-earnings ratio could give distorted results, whereas earnings-price ratio is more robust to the possible distortion.
E/P: the earnings-price ratio BETA: the systematic risk computed over 150 days using the market model.
Based upon the valuation models of Beaver, Lambert, and Morse (1980) and Ohlson (1989), several variables were identified that are expected to influence the magnitude of the earnings-price ratio. Most of these variables were found to be significant in determining the level of E/P ratios, especially the ex ante measures of risk and growth, and the payout ratio.