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. Asset Base

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

    A classified loan is any bank loan that is in danger of default.
  4. Bond Equity Earnings Yield Ratio ...

    The Bond Equity Earnings Yield Ratio (BEER) is a metric used ...
  5. Indicated Yield

    Indicated yield is the dividend yield that a share of stock would ...
  6. Asset Performance

    Asset performance refers to a business' ability to take operational ...
Related Articles
  1. Investing

    Yield Investing: Dividend, Earnings And FCF

    There are numerous ways to value investments, and many investors prefer a specific valuation method. Yield investing is one way to value a stock by comparing the current price to various factors. ...
  2. Investing

    Yield vs. Total Return: How They Differ

    Understanding yield vs. total return is essential in constructing portfolios that meet income generating needs while providing growth for the future.
  3. 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.
  4. Personal Finance

    Different needs, different loans

    When it comes to loans, there are many different types according to your needs. Find out what options are available when it comes to borrowing money.
  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. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  7. Personal Finance

    Getting a loan without your parents

    Do you want to receive a loan without the help of your parents? Use these five tips to finance your dreams without banking on a second signature.
  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

    Floating Rate Loans Look Attractive

    The search for income continues to remain a major priority for investors, as interest rates still sit at historically low levels. In order to get yield, many have moved up the maturity ladder. ...
RELATED FAQS
  1. Which is more important - dividend yield or total return?

    Learn to distinguish between those times when dividend yield or total return is a more useful performance metric for a company's ... 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 help you decide if this loan type is the right ... Read Answer >>
Hot Definitions
  1. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  2. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  3. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  4. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  5. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
  6. Watchlist

    A watchlist is list of securities being monitored for potential trading or investing opportunities.
Trading Center