Earnings Yield

Earnings yield is the inverse of the P/E ratio. Instead of showing how many dollars you pay per dollar of earnings, it shows what percentage return the company's earnings represent relative to the stock price. It is calculated by dividing earnings per share by the stock price and multiplying by 100.

A stock with a P/E of 20 has an earnings yield of 5 percent. A stock with a P/E of 10 has an earnings yield of 10 percent. Expressing valuation as a yield makes it directly comparable to bond yields, savings rates, and other return benchmarks.

Why Earnings Yield Is Useful

Earnings yield answers a practical question: if I buy this stock, what percentage return do the company's current earnings represent on my purchase price? Comparing this to the risk-free government bond yield provides an instant sanity check. If a stock's earnings yield is lower than the bond yield, you are accepting equity risk for less return than a risk-free alternative offers.

Earnings yield is also useful for comparing stocks across different price levels. A 500 dollar stock and a 20 dollar stock might have identical earnings yields, revealing they are equally priced relative to earnings despite the dramatic difference in share price.