Yield on Earning Assets: Definition, Formula & Example
Several financial ratios and metrics can be used to find out valuable information. For example, you can use various profitability ratios, market value ratios, and efficiency ratios, to name a few. But what about when you want to find out more information about assets?
The yield on earning assets is a great financial ratio that can provide you with a ton of insights into how effective your assets are performing. Continue reading to learn everything you need to know about the yield on earning assets ratio.
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KEY TAKEAWAYS
- A financial solvency ratio called yield on earning assets compares an entity’s interest income to its earning assets.
- It is a gauge of the amount of income assets are generating for the company.
- A corporation is using its assets effectively if there is a better yield on earning assets.
- An entity is able to satisfy its short-term debt commitments and is not in danger of defaulting or going bankrupt if it has a high yield on earning assets.
- To attain the proper ratio levels when compared to assets, banks must strike a balance between the number of loans issued, the interest rates levied, and the length of the loans.
What Is Yield on Earning Assets?
The yield on earning assets is a common financial solvency ratio that assesses the relationship between an institution’s generating assets and interest revenue. By examining the amount of income an asset generates, yield on producing assets can be used to gauge how well an asset is doing.
Formula to Calculate Yield on Earning Assets
The price-to-earnings (P/E) ratio and the earnings yield have the opposite relationship. So the quick way to lay out the formula to calculate yield on earning assets is as follows:
High Yield vs. Low Yield
A high yield on earning assets is a sign that a business is making significant profits from the loans and investments it makes. This is frequently the outcome of sound business practices, such as making sure loans are priced fairly and investments are managed effectively. As well as the company’s capacity to capture a larger portion of the market.
Regulators are interested in the yield on earning assets because financial firms that have a low yield on generating assets are more likely to go bankrupt. A low ratio indicates that a corporation is making poor-performing loans since the interest on those loans is getting close to the value of the earning assets.
Example of Yield on Earning Assets
Investor X is deciding between two potential stocks to invest in – Stock A and Stock B.
Stock A is currently traded at $16 per share and the company’s earnings per share (EPS) over the last year were $0.70.
Stock B is trading at $90 per share with an EPS over the same yearly period at $1.30 per share.
By using the above formula, Investor X can see that Stock A has an earnings yield of 4%, and Stock B has an earnings yield of 1.4%. Meaning that Stock A is the better option.
Summary
The yield on earning assets is a useful metric to consider when investing in a stock.
A high yield on earning assets is a sign that a business is making significant profits from the loans and investments it makes. Good policies frequently lead to this.
Regulators are interested in the yield on earning assets because financial firms that have a low yield on generating assets are more likely to go bankrupt.
As always, it’s important to use other metrics alongside this one to get the clearest picture possible.
FAQS on Yield on Earning Assets
Earning assets are investments that generate revenue and are owned or retained by a company, organization, or person.
Earnings yield is calculated by dividing 12-month earnings by the share price.
The earnings yield reflects the tangible and intangible yield of the company, whereas the dividend yield simply catches the tangible yield of the organization.
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