Investments
Asset class - shares
Outcomes of the ratios in practice
Using our examples of the share prices, Woolworths shares pay a lower dollar value dividend than BHP.
Therefore, Woolworths’s dividend yield is lower of 4% versus 5%.
Woolworths earnings yield of 6.7% is lower than BHP’s of 10%.
The P/E Ratio of Woolworths is higher than BHP, therefore it will take longer for Woolworths to earn the income to equal the initial capital investment than BHP (with these assumptions).
On these considerations alone, an investor would require faster capital growth on the Woolworths shares to justify investing in it compared to shares in BHP.
Of course, in reality, you would examine a whole range of other factors before deciding to invest in Woolworths or BHP. We’re just keeping the analysis simple to illustrate how to use the ratios.
