DEFINITION of 'Yield On Earning Assets'

The yield on assets is a popular financial solvency ratio that compares a financial institution’s interest income to its earning assets. Yield on earning assets (YEA) indicates how well assets are performing by looking at how much income they bring in. As a measure of effectiveness, yield on assets can be useful for comparing different managers relative to their asset bases.

Managers (or entire businesses) that can generate sizable yield (cash flow) with a small asset base are considered to be more efficient, and likely offer more value.

BREAKING DOWN 'Yield On Earning Assets'

Banks and financial institutions that provide loans and other investment options that offer yields have to strike a balance between the different types of investment vehicles, duration, and markets that it offers loans to. Generally speaking, the higher a company’s loan to asset ratio, the higher its yield on returning assets. This is because higher-yielding investment vehicles bring in more income relative to the amount of money on loan.

High yield on returning assets is an indicator that a company is bringing in a large amount of dividend and investment income from the loans and investments that it makes. This is often the result of good policies, such as ensuring that loans are properly priced, and investments are properly managed, as well as the company’s ability to garner a larger share of the market.

Financial institutions with a low yield on earnings assets are at an increased risk of insolvency, which is the reason the YEA is of interest to regulators. A low ratio means that a company is providing loans that do not perform well since the amount of interest from those loans is approaching the value of the earning assets. Regulators may take this as an indicator that a company’s policies are creating a scenario in which the company will not be able to cover losses, and could thus become insolvent.

Increasing a Low Yield On Assets

Increasing a low YEA often involves a review and restructuring of a company’s policies and approach to risk management, as well as a review of the general operations of how the company chooses which loans to provide to which markets.

Depending on the business or strategy, at times, yield on assets may need to be adjusted for various methods of compiling financial statements. For instance, certain off-balance sheet items could distort reported yield on assets when using financial statements that have not been adjusted.

RELATED TERMS
  1. Breakeven Yield

    The breakeven yield is the yield required to cover the cost of ...
  2. Yield

    Yield is the return a company gives back to investors for investing ...
  3. Average Annual Yield

    The average yield on is the sum of all interest, dividends or ...
  4. Asset Base

    Asset base refers to the underlying assets giving value to a ...
  5. Classified Loan

    A classified loan is any bank loan that is in danger of default.
  6. Asset Financing

    Asset financing uses a company’s balance sheet assets, including ...
Related Articles
  1. Investing

    Comparing P/E Ratio, EPS and Earnings Yield

    P/E ratios may be the established standard for valuation, but earnings yields are especially useful for comparing returns across different instruments.
  2. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  3. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  4. Retirement

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
  5. Retirement

    10 Ways to Borrow in Retirement

    Before you take money from your nest egg, consider these 10 other ways to borrow in retirement.
  6. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  7. Personal Finance

    How Mortgage Loan Officers Work: Protect Yourself

    Learn how a mortgage loan officer thinks while offering you mortgage products so you can protect yourself and choose and compare the best loan for you.
  8. Investing

    Asset Turnover Ratio

    Investopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ...
  9. Investing

    Bond yield curve holds predictive powers

    This measure can shed light on future economic activity, inflation levels and interest rates.
  10. Investing

    Analyzing Investments With Solvency Ratios

    Solvency ratios are extremely useful in helping analyze a firm’s ability to meet its long-term obligations; but like most financial ratios, they must be used in the context of an overall company ...
RELATED FAQS
  1. What is the difference between yield and return?

    Return is the financial gain or loss on an investment. Yield measures the income, such as interest and dividends, from an ... Read Answer >>
  2. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to determine if this loan type is the right financial ... Read Answer >>
  3. How do current assets and fixed assets differ?

    Current assets are short-term assets that are used up within one year. Fixed assets are physical assets and have a life of ... Read Answer >>
Trading Center