Yield - what is it?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Every economic activity has as its goal a profit (or a positive return). And what is it from an economic point of view? The answer to this question will be discussed in the article. Also, besides this, it will be discussed what the rate of return is and how to calculate it.

What is yield?

Under the profitability in economic sciences mean a relative indicator that shows the effectiveness of investments in individual assets, projects, financial instruments or in the whole business. From a mathematical point of view, this indicator can be viewed as the ratio of the total amount of funds received to a certain base. And what is meant by it?

Under the base understand the amount of initial investment or the amount of money that had to be invested in order to get a given amount of money. Therefore, the entire performance evaluation system is also called the rate of return. Can this indicator be viewed from a negative side? Yes, returns can be positive or negative. Under the first one, they mean that the company returned the money spent and still has a plus. Undernegative returns imply that the invested funds did not pay off and there is no need to talk about net profit.

Rate of return

This indicator is necessary to evaluate the effectiveness of invested funds. The rate of return is a term that refers to the effectiveness of invested funds. So, if the word “internal” is in front, then this means that the current value of the investment is zero, and all the funds received, which go as profit from economic activity, are equal to the costs at the beginning of the business or project. With its help, you can determine the level of investment, which in any case will cost no loss for the owner of the money. The internal rate of return shows the level of return on investment, as well as the maximum amount that makes sense to invest in this enterprise.

Yield Ratings

If you buy shares, then how to find out their past, then how much they brought profit to their owners a month or a year ago? Especially for this, there are special profitability ratings. They select the very best securities that provide the greatest returns in the short term. The profitability rating, in addition to the amounts of profit, may also contain cost indicators. And if the company's securities are listed on stock exchanges for a long time - years or decades, then you can assess the trend of their development and better approach the decision whether to buy them or not. Profitability is a serious indicator, and it should be determined withusing as much information as possible.

Calculation

How to calculate profitability? To do this, you need to use a simple formula:

D=(SFACP - SFANP) / SFANP.

The abbreviation data is deciphered as follows:

1. Y - yield.
2. SFCF - the value of financial assets at the end of the period. Be sure of what is being researched.
3. FFANP - the value of financial assets at the beginning of the period. Be sure of what is being researched.

Forecast values can also be used as values. So, you can know the value of the stock at the beginning of the year, see the expected value and decide whether to buy the security or not. But doing something with only projected returns in front of you is a thankless task. It would not hurt to know about the state of affairs in past years.

When rational investment strategies are compared, return and risk always move in the same direction with changes, other things being equal. So, the higher the profit, the greater the risks.

For clarification, you can use an example: two people come to the bank. The first is a we althy citizen who has a stable and well-paid job, a house and asks for a loan. The loan is issued at 20% per annum. The second person works odd jobs, abuses alcohol and has a number of other bad habits. He is given a loan at 40%. Further, the bank completes all the obligations of people such as person No. 2 into one portfolio of securities and sells them with such a highthe level of profitability. But if you think about it: where can you earn more? The second option is more profitable. With the first person, the yield is lower. But here it is also less likely that he will refuse to pay you money. Therefore, when considering investment proposals, it should be remembered that profitability is not the only parameter that should be considered.

Conclusion

Therefore, in the end, we can conclude: the higher the yield, the greater the risk. Excessively high opportunities for losing investments are not attractive to investors, so most people prefer to direct their money to something relatively safe and stable. Profitability is a mandatory parameter, because without it there is no point in investing your funds in something.