SavvyGrowthPaths

What is Earnings Yield?

Earnings yield is the ratio of a company’s earnings to its market price. In essence, it shows what percentage of your investment in a stock is ‘earned’ back annually in profit. The formula is :

Earnings Yield = (Earnings per Share (EPS) / Stock price) ​× 100

For example, if a stock is priced at $100 and generates $10 in earnings per share, its earnings yield is 10%.

Real Company Examples: SalMar vs. Mowi

1. SalMar

Company Overview:
SalMar is one of the world’s largest producers of farmed salmon. The company operates in various markets, primarily in Norway, and is known for its innovative approach to aquaculture.

Recent Earnings Data:

• Earnings per Share (EPS): 14.23 NOK
• Stock Price (as of Dec 2024): 420 NOK
• Earnings Yield Calculation:

Earnings Yield = (14.23/420) × 100 = 3.39%

Interpretation:
SalMar’s earnings yield of 3.39% might appear modest compared to other sectors. This could reflect the stable, relatively low-risk nature of the seafood industry, where demand is consistently strong. However, considering the risk-free rate (for example, 3% from Norwegian government bonds), the 3.39% yield might indicate a reasonable investment, particularly if SalMar is expected to continue growing or maintain profitability.

2. Mowi

Company Overview:
Mowi, formerly known as Marine Harvest, is the largest seafood company in the world by revenue. It operates in over 25 countries and is a key player in the global salmon market. Mowi focuses heavily on sustainable practices and has strong global distribution networks.

Recent Earnings Data:

• Earnings per Share (EPS): 18.67 NOK
• Stock Price (as of Dec 2024): 350 NOK
• Earnings Yield Calculation:

Earnings Yield = (18.67/350) × 100 = 5.33%

Interpretation:
Mowi’s earnings yield of 5.33% is higher than SalMar’s, indicating that investors are potentially earning a higher return for each unit of currency invested in the stock. However, this could reflect greater market uncertainty or risk associated with Mowi’s operations, or simply a market mispricing. This higher yield might also indicate that Mowi’s stock is undervalued compared to its earnings potential.

Comparing SalMar and Mowi Using the Earnings Yield Yardstick

Let’s compare both companies using the earnings yield to understand their relative attractiveness:

• Risk-Free Rate (3%): Both companies offer higher yields than the risk-free rate, but Mowi’s higher yield (5.33%) might seem more appealing at first glance.
• Industry Comparison: The seafood industry, especially salmon farming, is generally seen as stable with demand driven by health trends and global food consumption. The earnings yield of both companies suggests moderate returns, but the decision hinges on other factors such as growth potential, sustainability initiatives, and market outlook.
• Growth Prospects: If Mowi is expected to grow more rapidly or expand into new markets, its higher yield could reflect investor skepticism about future profitability. Alternatively, SalMar’s lower yield might indicate confidence in its future stability and profitability.

Conclusion: Applying the Earnings Yield Yardstick to SalMar and Mowi

Using earnings yield as a yardstick, Mowi appears to offer a higher potential return on investment, but it also carries higher risk—reflecting investor uncertainty about its future prospects. SalMar, on the other hand, offers a more modest yield, which might signal greater stability.

Both companies could be appealing based on different investment strategies: Mowi might attract investors seeking higher returns with a slightly higher risk profile, while SalMar might suit those preferring stability in an established industry.

Happy Investing !

Disclaimer:

The information provided in this article is for educational and informational purposes only and does not constitute financial advice. The earnings yield calculations and analysis of SalMar and Mowi are based on publicly available data at the time of writing and should not be used as the sole basis for making investment decisions. Investing in stocks involves risk, and it is important to conduct thorough research and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results.