What is Earnings Yield?
Definition
Earnings yield is the inverse of the P/E ratio, calculated as earnings per share divided by the stock price, expressed as a percentage. It allows direct comparison between stock returns and bond yields, making it useful for cross-asset valuation decisions.
Detailed Explanation
Earnings yield flips the P/E ratio to express valuation as a percentage return. A stock with a P/E of 20 has an earnings yield of 5% (1/20). This format makes it easy to compare stocks with bonds — if the 10-year Treasury yields 4% and a stock has an earnings yield of 7%, the stock offers a 3% premium for bearing equity risk.
The earnings yield is a key component of the Fed Model, which compares the S&P 500 earnings yield to the 10-year Treasury yield. When the earnings yield significantly exceeds the bond yield, stocks are considered relatively attractive, and vice versa. While the Fed Model has its critics, the earnings yield remains a useful framework for thinking about equity valuations in the context of interest rates.
Joel Greenblatt's Magic Formula uses earnings yield (specifically EBIT/EV) as one of two factors for stock selection. His research showed that buying high-earnings-yield, high-return-on-capital companies systematically outperformed the market over long periods.
Forward earnings yield, based on expected future earnings, is generally more useful than trailing earnings yield. In a rising interest rate environment, investors demand higher earnings yields (lower P/E ratios) to compensate for the increased opportunity cost of holding stocks versus bonds.
Formula
Earnings Yield = EPS / Stock Price x 100 = 1 / P/E Ratio x 100Example
A stock trading at $50 with EPS of $4 has an earnings yield of 8% ($4/$50). Compared to a 4.5% Treasury yield, this stock offers a 3.5% equity risk premium.
Frequently Asked Questions
How does earnings yield compare to dividend yield?
What is a good earnings yield?
Related Terms
Earnings Per Share (EPS)
Earnings Per Share (EPS) measures a company's net profit divided by its outstanding shares of common stock. It is one of the most widely used metrics for evaluating a company's profitability on a per-share basis and comparing performance across companies.
Price-to-Earnings Ratio (P/E)
The Price-to-Earnings Ratio (P/E) compares a company's current stock price to its earnings per share. It indicates how much investors are willing to pay for each dollar of earnings, making it one of the most common valuation metrics in stock analysis.
Dividend Yield
Dividend yield is a financial ratio that shows how much a company pays in dividends each year relative to its stock price. Expressed as a percentage, it helps income-focused investors compare the cash return of dividend-paying stocks.
Fair Value
Fair value is the estimated rational price of a stock or asset based on objective analysis of fundamentals, growth prospects, and comparable valuations. It represents the price at which an informed buyer and seller would agree to transact in an arm's-length transaction.
See It in Action
Disclaimer: The information on this page is provided for educational and informational purposes only and does not constitute investment advice. AI-generated analysis may contain errors or inaccuracies. Always conduct your own research and consult a qualified financial advisor before making investment decisions.
See Earnings Yield in Action
StoxPulse AI automatically tracks and analyzes key financial metrics from earnings calls and SEC filings for your watchlist.