What is Earnings yield?
Foyda rentabelligi
In short
EPS ÷ price, i.e. 1 ÷ P/E. A P/E of 25 is a 4% earnings yield: $4 of annual profit per $100 of price.
Earnings yield is the inverse of P/E: it shows, as a percentage, how much profit a company earns per year for every $100 of share price.
Earnings yield = EPS ÷ Price × 100% = 1 ÷ P/E × 100%
A P/E of 25 is 4%; a P/E of 10 is 10%.
Why it is useful
- Easy to compare with other returns. Because it is a percentage, you can set it next to the expected return of other investments: when the stock market's earnings yield is far below the alternatives, stocks are seen as relatively expensive.
- Works with negative earnings. For a loss-making company P/E is meaningless, while earnings yield is simply negative — so companies can be ranked in a single list.
- Intuitive: "$4 of profit per $100" is easier to grasp than "25 times".
An important distinction
Earnings yield is not the cash you receive. Only part of the profit is paid out as a dividend (the dividend yield); the rest is reinvested in the business or spent on buybacks. It is also a snapshot based on today's profit: for a fast-growing company a low earnings yield can be justified by expected growth.
A P/E of 25 means $4 of annual profit per $100 of price. The market compares stocks with the "safe" bond yield; this is for comparison only, not a suggestion to buy bonds.
Example
Hypothetical numbers:
- Stock A: price $80, EPS $4 → 4 ÷ 80 = 5% (P/E 20)
- Stock B: P/E 25 → 1 ÷ 25 = 4%
- Stock C: P/E 12.5 → 1 ÷ 12.5 = 8%
- Stock D: price $50, EPS −$2 → −2 ÷ 50 = −4% (P/E not meaningful)
C earns $8 per $100 of price each year, B earns $4. But if B's profit grows 20% a year, after three years its EPS is 1.2³ ≈ 1.73 times larger, and its yield on today's price reaches about 4% × 1.73 ≈ 6.9%. That is why a low earnings yield has to be judged together with growth.
Mistakes and tips
Don't confuse earnings yield with dividend yield — the first is the profit the company earns, the second is the cash paid to you.
In cyclical companies a high yield at peak earnings is deceptive — also calculate it with a multi-year average EPS.
Don't pick stocks on one metric: a value trap also shows up with a high earnings yield.
Frequently asked questions
- How do you calculate earnings yield?
- Divide earnings per share (EPS) by the share price and multiply by 100. Or simply divide 1 by the P/E.
- Is a high earnings yield good?
- It shows the stock is cheap relative to its profit, but not its quality. If profit is falling, a high yield can disappear quickly.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
Try the theory without risk
Open a free account: demo trading with a $10,000 virtual balance, a trading journal, calculators and a step-by-step course.