Explanation

When dealing with companies that have losses or zero earnings, traditional P/E ratios become problematic:

• Justified P/E and Forward P/E both become undefined or meaningless when earnings are zero or negative, as they involve dividing by earnings.

• Earnings yield (E/P) is the most suitable because:

  • It can handle negative earnings (negative earnings yield)
  • It can handle zero earnings (zero earnings yield)
  • It provides a meaningful ranking across all companies regardless of profitability
  • It's simply the inverse of the P/E ratio

Earnings yield allows for a consistent comparative analysis across profitable, unprofitable, and break-even companies in the same industry.