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

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%

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).

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.

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.