Definition
Earnings Yield
Earnings yield is the inverse of the P/E ratio, expressing a company's earnings as a percentage of its price, comparable to a bond yield.
Earnings Yield = EPS / Price = 1 / P/E. A stock with a P/E of 20 has a 5% earnings yield, that is, ₹5 of earnings for every ₹100 invested. It lets you compare equity returns directly with bond yields and bank deposit rates.
When the market's earnings yield is well below the 10-year G-Sec yield, stocks may be expensive relative to bonds (a low equity risk premium). Earnings yield is the basis of valuation tools like the 'Fed model' and Joel Greenblatt's Magic Formula.
Related terms
- Coupon and Yield (Bonds)A bond's coupon is its fixed interest rate on face value, while yield is the actual return based on the price you pay, which moves inversely to price.
- Equity Risk PremiumThe equity risk premium is the extra return investors expect from stocks over risk-free assets, compensating for higher risk.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.