Valuation
Earnings yield
Earnings per share divided by price — the P/E ratio inverted, expressed as a percentage.
How it works
Flipping the P/E makes it directly comparable to a bond yield. A P/E of 25 is a 4% earnings yield, which can be set against what government debt pays.
It also handles the awkward cases better: a company with tiny profits has a near-zero earnings yield rather than an absurd P/E.
Formula
Earnings yield = earnings per share ÷ share price × 100, or simply 1 ÷ (P/E)Related terms
- P/E ratioThe share price divided by earnings per share — roughly, how many years of current profit you are paying.
- Risk-free rateThe return available with essentially no risk of default, used as the baseline for every other return.
- Fed modelA rough comparison of the market’s earnings yield with the government bond yield.
- Free cash flow yieldFree cash flow divided by market value — the cash return the business generates relative to its price.
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.