Earnings Yield Key takeaways
* Earnings yield = 12-month earnings per share (EPS) ÷ current share price.
* It is the inverse of the P/E ratio: Earnings yield = 1 ÷ (P/E).
* Useful for comparing stock returns to bond yields and for spotting potentially undervalued or overvalued stocks.
* Must be interpreted alongside growth prospects, earnings quality, and economic context.
Definition and calculation Earnings yield measures a company’s earnings expressed as a percentage of its current share price. It shows the return on investment implied by current earnings, before dividends or capital gains. Formula:
* Earnings yield = EPS (last 12 months) ÷ Share price Explore More Resources
Equivalently:
Earnings yield = 1 ÷ (P/E ratio) Example calculation:
If a stock trades at $175 and trailing 12-month EPS is $7.57:
Earnings yield = 7.57 ÷ 175 ≈ 0.043 or 4.3% Explore More Resources
How it’s used
* Valuation comparison: Money managers often compare the earnings yield of a market index (e.g., S&P 500) to yields on risk-free assets such as the 10-year Treasury. If equity earnings yield is below the Treasury yield, stocks may be considered expensive relative to bonds; if higher, equities may look relatively cheap.
* Asset allocation: Earnings yield helps determine whether equities offer sufficient compensation (a risk premium) over safer fixed-income alternatives.
* Return assessment: For income-oriented investors, earnings yield can indicate the theoretical earnings-based return available from a stock, complementing dividend yield.
Earnings yield vs. P/E ratio Both metrics convey the same information in different forms:
High P/E → low earnings yield → investors are paying more for each dollar of earnings (often reflecting growth expectations).
Low P/E → high earnings yield → investors are paying less for each dollar of earnings (may indicate undervaluation or weak prospects). P/E is commonly used for valuation; earnings yield is often used when comparing expected return across asset classes (stocks vs. bonds). Explore More Resources
Limitations and considerations
* Growth expectations: Fast-growth companies typically have low earnings yields because investors pay for future earnings growth. A low yield does not automatically mean overvaluation.
* Earnings quality and volatility: One-time items, accounting differences, or cyclical earnings can distort trailing EPS and thus the yield.
* Not a standalone signal: Use alongside other metrics (cash flow, revenue growth, dividend outlook, balance sheet strength) and macro factors (interest rates, inflation).
* Market context: What constitutes a "good" earnings yield depends on prevailing bond yields and required risk premium.
Example: Meta (illustrative) In April 2019 Meta traded near $175 with trailing EPS of $7.57:
* Earnings yield = 7.57 ÷ 175 ≈ 4.3% Historically, that yield was higher than earlier readings (around 1–2.5%), reflecting price fluctuations and changing investor expectations. A rising earnings yield can reflect falling prices (higher return per dollar of earnings) or improving earnings; either can attract buyers if future earnings are expected to recover or grow. Explore More Resources
When to use earnings yield Use earnings yield when you want a quick, earnings-based return comparison between equities and fixed-income alternatives, or when screening for value across markets. Always combine it with growth analysis and quality checks on earnings before making investment decisions.