Earnings YieldE/P
Earnings yield is earnings per share divided by the share price — the inverse of the P/E ratio. A stock with a P/E of 20 has an earnings yield of 5%, which makes it easy to compare stocks with bond yields and interest rates.
The P/E ratio says how many dollars you pay for one dollar of earnings. Flip it and you get the earnings yield: how many cents of earnings each dollar of share price buys. Expressed as a percentage, it can be lined up directly against bond yields and savings rates. This entry explains the formula, how to use it and its limits.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- E/P ratio, Earnings-to-price ratio, Inverse P/E
- Updated
Earnings yield in plain words
Earnings yield relates a company's last-twelve-month earnings per share to its share price, and it is the inverse of the P/E ratio.1
The quick formula is E ÷ P — earnings divided by price — showing earnings generated per dollar invested.1
Value stocks tend to have low P/E ratios, which means high earnings yields.2
How to use earnings yield, step by step
Get EPS
Trailing twelve months. See Earnings per Share.
Get the share price
Current market price.
Divide
EPS ÷ price × 100.
Compare with bonds
Against the 10-year Treasury yield. See Treasury Bills, Notes and Bonds.
Compare with peers
Higher yield = cheaper on earnings.
Check earnings quality
One-offs distort it. See Quality of Earnings.
Worked examples
Example 1 — Basic calculation
5% yieldEPS $4, share price $80.
| Earnings yield | $4 ÷ $80 = 5% |
| P/E | $80 ÷ $4 = 20 |
Earnings yield is the inverse of the P/E ratio.1
Example 2 — Stocks vs bonds
Stocks look pricierA stock index has a P/E of 25; the 10-year Treasury yields 4.5%.
| Index earnings yield | 1 ÷ 25 = 4% |
| Gap vs bonds | 4% − 4.5% = −0.5 points |
Comparing earnings yield with bond yields gives a rough sense of how attractive stocks are. See Equity Risk Premium.
Example 3 — Ranking two stocks
A cheaper on earningsStock A: EPS $3, price $30. Stock B: EPS $3, price $60.
| A | 10% |
| B | 5% |
Per dollar invested, stock A generates twice the earnings — though growth prospects may explain the gap. See Growth vs Value Stocks.
Earnings yield vs dividend yield
| Aspect | Earnings yield | Dividend yield |
|---|---|---|
| Numerator | All earnings | Dividends paid |
| Includes retained profit | Yes | No |
| Inverse of | P/E | Price ÷ dividend |
| See also | P/E ratio | Dividend Yield |
How investors use earnings yield
Comparing with bonds
Stocks vs fixed income.
Value screening
Ranking stocks by cheapness. See Factor Investing.
Market valuation
Index-level earnings yield over time.
Return expectations
A rough long-run return anchor.
Advantages and disadvantages
Advantages
- Directly comparable to bond yields.
- Works when P/E is meaningless for tiny earnings.
- Simple to calculate.
Disadvantages
- Ignores growth.
- Distorted by one-off earnings.
- Says nothing about valuation quality on its own.
Going deeper
Read as far as you need. Each level builds on the one before it.
A return measure
Beginner
Earnings yield works as a rough return-on-investment measure for a stock.1
Not a full valuation
Intermediate
Unlike P/E comparisons, earnings yield alone cannot tell you whether a stock is fairly valued.1 See Price-to-Earnings Ratio.
Negative earnings
Advanced
When earnings are negative, P/E is meaningless but earnings yield simply turns negative, which keeps rankings continuous. See Earnings per Share.
Common mistakes
Treating it as cash paid
Most earnings are not paid out.
Ignoring growth
Low yield can mean high expected growth.
Using one-off earnings
Normalise first.
Comparing different periods
Use consistent earnings periods.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Earnings yield = EPS ÷ price.
- It is the inverse of the P/E ratio.
- It compares easily with bond yields.
- Higher yields mean cheaper on earnings.
- It ignores growth and earnings quality.
Frequently asked questions
What is a good earnings yield?
What is the Fed model?
Can earnings yield be negative?
Further learning
- Price-to-Earnings Ratio
The inverse ratio.
- Equity Risk Premium
Stocks' extra return over bonds.
- Dividend Yield
The cash-paid version.
- Growth vs Value Stocks
Why yields differ.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. Earnings Yield (opens in a new tab) Checked .
- Investor.gov (SEC). Stocks – FAQs (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.