Earnings Yield

What is Earnings Yield?

The inverse of the P/E ratio, calculated as earnings per share divided by share price, showing the earnings return on each dollar invested in the stock.

Overview

Earnings yield is a company's trailing twelve month (TTM) net income divided by its market capitalization, expressed as a percentage. It is the inverse of the price to earnings ratio and shows how many cents of profit the business earns for every dollar of market value.

Because it is stated as a percentage, earnings yield can be set side by side with other yields, such as a stock's dividend yield or the yield on a government bond. That makes it a convenient way to think about a stock as a stream of earnings rather than as a price multiple.

Alternative Names: E/P Ratio, Earnings-to-Price Ratio, Inverse P/E

Formula

Earnings Yield = (TTM Net Income ÷ Market Capitalization) × 100

Per-share form: Earnings Per Share ÷ Share Price × 100

Where:

TTM Net Income: Net income summed over the four most recent reported quarters. If four quarters are not available, FinSpry uses the latest fiscal year
Market Capitalization: Latest closing share price multiplied by shares outstanding. See market capitalization

How FinSpry calculates it: FinSpry divides TTM net income by market capitalization and rounds the result to two decimal places. The value keeps its sign, so a company with a net loss shows a negative earnings yield. This is one practical difference from the P/E ratio, which FinSpry leaves blank when earnings are zero or negative. The per-share version, earnings per share divided by price, gives nearly the same answer. Small differences can appear because the share count used for EPS and the one used for market capitalization are not always identical.

Calculation Example

Here is the calculation for a hypothetical company:

Example Company - Financial Data:

Share Price	$50.00
Shares Outstanding	200,000,000
Market Capitalization	$10,000,000,000
TTM Net Income	$600,000,000

Calculate Earnings Yield

Earnings Yield = $600,000,000 ÷ $10,000,000,000 × 100

= 6.00%

Check With Per-Share Figures

EPS = $600,000,000 ÷ 200,000,000 = $3.00

Earnings Yield = $3.00 ÷ $50.00 × 100 = 6.00%

P/E = $50.00 ÷ $3.00 = 16.67, and 1 ÷ 16.67 ≈ 6.00%

Interpretation: The company earned $6 of profit over the past year for every $100 of market value. Not all of that profit reaches shareholders as cash. Part may be paid as dividends and the rest kept in the business, but all of it belongs to the owners.

How to Interpret

A higher earnings yield means investors pay less for each dollar of current profit. A lower earnings yield means they pay more, usually because they expect profits to grow. There is no single correct level. The bands below mirror common P/E ranges, since a P/E of 25 equals a 4% earnings yield and a P/E of 15 equals about 6.7%.

General Guidelines:

High Earnings Yield (Above About 7%)

The market is pricing the company cheaply relative to its recent profit. This can point to an overlooked business, but it can also reflect expected declines in earnings, a one-time gain that inflated net income, or risks specific to the industry.

Moderate Earnings Yield (About 4% to 7%)

Roughly equivalent to a P/E between 14 and 25, a range where many established companies trade. Growth expectations and earnings quality decide whether the price is reasonable.

Low or Negative Earnings Yield (Below About 4%)

Investors are paying a high price for each dollar of current profit, which only works out if earnings grow substantially. A negative value means the company lost money over the past twelve months.

Comparing With Bond Yields: Some investors compare a stock's earnings yield, or the earnings yield of a whole index, with the yield on government bonds. The gap between the two is a rough gauge of the extra return stocks offer for their extra risk. Keep in mind that a bond's coupon is contractual while a company's earnings can rise or fall.

Why It Matters

Works With Losses: P/E becomes meaningless when earnings are near zero or negative. Earnings yield moves smoothly through zero, so loss-making companies can still be ranked on the same scale.
Easy to Rank: Sorting by earnings yield from high to low gives the same order as sorting by P/E from low to high, without the distortion that very small earnings cause in a P/E figure.
Comparable Across Assets: Expressing profit as a percentage of price puts stocks on the same footing as bonds, savings rates and dividend yields.

Limitations

Accounting Earnings Only: Net income includes non-cash items and one-time gains or charges. A company can show a high earnings yield while generating little cash. Checking the free cash flow yield helps confirm that profits turn into cash.
Backward Looking: TTM figures describe the past year. They say nothing directly about whether earnings will grow or shrink.
Ignores Debt: Market capitalization covers only equity. Two companies with the same earnings yield can carry very different amounts of debt.
Cyclical Distortion: At the peak of a business cycle, earnings are high and the yield looks attractive just before profits fall.

Common Variant: Some investors, including Joel Greenblatt in his Magic Formula approach, define earnings yield as EBIT divided by enterprise value. That version accounts for debt and cash and is the inverse of the EV/EBIT ratio. FinSpry's earnings yield uses net income and market capitalization, so it matches the inverse of P/E instead.

Related Financial Ratios

These related metrics provide additional insights for comprehensive financial analysis:

Price to Earnings Ratio (P/E)

The same relationship expressed as a multiple: market capitalization divided by net income. Undefined when earnings are negative.

Free Cash Flow Yield

Free cash flow divided by market capitalization. Shows whether reported profits are backed by cash.

Dividend Yield

The portion of the return paid out in cash. Dividend yield divided by earnings yield approximates the payout ratio.

EV/EBIT Ratio

A debt-inclusive multiple whose inverse is the enterprise-value version of earnings yield.

Use This Metric

Earnings yield appears on each stock's statistics page. To filter the whole market, screen by its inverse, the P/E ratio.

Screen by P/E Ratio

Is the stock cheap or expensive?

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