Most long-term investors usually make use of value stock investing as a favorite method to generate a kind of profit that will be greater than the annual returns of the stock market.  The kind of stock generally sought for by value investors are those that are currently out of favor with Wall Street, but possess the underlying value which in the future will make them more worthy. In another way, you may even decide to call value stocks temporarily on sale since currently they are relatively cheap.

Earning yield (EY) is one of the primary screens that can be used to look for individuals to buy in value stock investing. You can find these screens on some of the free money research sites. E.Y. appears to be a simple concept on the surface; that is you divide a company’s net earnings by the price per share, and then multiply it by 100%. The result will be a percentage which is equals to what the stock will yield if it has distributed all of its earnings. If after searching on your favorite stock screening web sites and you don’t find this indicator, what you have to do is take the P/E ratio (which can be located on nearly all screening web sites) and multiply or invert it by 1/x. This shows that whenever the number is higher, stock will be relatively cheaper to its earnings.

Besides this method of calculating earnings yield, there is another method which is more complicated but has the advantage of giving you a much better view of a company’s value when compared with its earnings. According to Joel Greenblatt, this alternative EY’s formula is EY equals to pre-tax operating profit (EBIT)/ Enterprise Value. Further, this alternative is useful when comparing stocks with different levels of debt and have different tax rates.

If we are to consider the alternative formula, the numerator in the equation (EBIT) can be gotten from the income statement of the company, while the denominator (Enterprise Value) is calculated by adding all the values of preferred and common equity to the value of interest bearing debt that a company is owing. You can find a company’s interest bearing debt on its balance sheet.

The major reason why this alternative way of calculating earnings yield is better than the much common E/P method is because it presents a more accurate view of a company’s cash flow operations and secondly when comparing multiple companies with each other, this method gives a more balance view. For instance, if you are to compare a company using debt to finance its growth to another with little or no debt, then you will realize that this method will clarify or clearly state which company is making better earnings when compared to its overall financial structure. Thus, when it comes to value stock investing this method is clearly superior and second to none.

When an investor wants to consider or determine what stock to buy and when to buy them, he should only buy stocks that are going up. This means that when stocks are not going up, don’t buy.