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Hi Sir,
So sorry to post again. I am quite confused 🙁
Assume that GWW Cos P/E ratio is 15. Its competitor’s earnings yield is 6.25%.
When comparing GWW Co to its competitor, which of the following is correct?So I worked out;
GWW yield 6.7
Competitors 6.25GWW PE 15
Competitors 16So I selected higher for yield and lower for PE but it is the opposite way around on the answer page (earning yield of GWW lower and P/E ratio of GWW higher)
Thank you in advance and sorry once again!
The correct answer is that the earnings yield of GWW Co is lower and the P/E ratio of GWW Co is higher compared to its competitor.
This may seem counterintuitive, but it is because the earnings yield and P/E ratio are inversely related. The earnings yield is calculated by taking the reciprocal of the P/E ratio.
So, if the P/E ratio is higher, the earnings yield will be lower, and vice versa. In this case,GWW Co has a higher P/E ratio of 15 compared to its competitor, which results in a lower earnings yield of 6.7% for GWW Co. Conversely, the competitor has a lower P/E ratio of 16, which leads to a higher earnings yield of 6.25%.
Thank you sir.
I understand that if the PE is higher the earnings yield will be lower thank you for explaining, but 15 is a lower number than 16 so I don’t quite understand how the PE is higher than the competitor when the actual number is lower?
I have seen another example where the answer is the other way around;
DD Co’s P/E ratio is 12. Its competitor’s earnings yield is 10%.
When comparing DD Co to its competitor, which of the following is correct?
Earning yield – P/E ratio
A Higher Higher
B Higher Lower
C Lower Higher
D Lower LowerThe correct answer is C and I understand this because DD CO’s PE is 12 and the competitor is 10, so the PE is higher and the yield will be lower
Honestly, I am also confused with same question, almost stuck. i dont understand how eanding yield can be lower for GWW when it is 6.7% compared to the 6.25% for competitor, Same way for GWW P/E is 15 while its 16 for the COmpetitors
But answers says other way around,
This may seem counterintuitive, but it is because the earnings yield and P/E ratio are inversely related.
The earnings yield is calculated by taking the reciprocal of the P/E ratio.
So, if the P/E ratio is higher, the earnings yield will be lower, and vice versa. In this case,GWW Co has a higher P/E ratio of 15 compared to its competitor, which results in a lower earnings yield of 6.7% for GWW Co.
Conversely, the competitor has a lower P/E ratio of 16, which leads to a higher earnings yield of 6.25%.
Along with
DD Co’s P/E ratio is 12. Its competitor’s earnings yield is 10%.
So that means the competition has a PE ratio of 10 – 1/0.10
Whilst DD has an earnings yield of 8.33 – 1/12When comparing DD Co to its competitor, which of the following is correct?
Earning yield – P/E ratio
A Higher Higher
B Higher Lower
C Lower Higher
D Lower LowerThe correct answer is C and I understand this because DD CO’s PE is 12 and the competitor is 10, so the PE is higher and the yield will be lower
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