Earnings Yield

What Is Earnings Yield?

Earnings yield shows how much of a company's profit is attached to each share, measured against what that share costs. It is usually written as a percentage, and it gives a rough sense of how much annual earnings an investor receives for every dollar paid for a stock. Because it is the inverse of the price-to-earnings ratio, it offers another way of looking at the same valuation information.

How It Is Calculated

Earnings yield is found by dividing earnings per share by the current share price, then multiplying by 100 to express the result as a percentage:

Earnings Yield = (Earnings per Share / Share Price) x 100

For example, suppose a company earned $4 per share over the past year and its shares trade at $80. The earnings yield is 4 divided by 80, or 0.05, which equals 5%. If earnings stayed the same but the share price fell to $40, the yield would rise to 10%. If the price rose to $160, the yield would fall to 2.5%. Analysts may use trailing earnings from the last twelve months or estimated future earnings, and the choice affects the result.

How Investors Use It

Investors often compare earnings yield with other yields to judge how much return the stock market offers relative to alternatives. Comparisons with the bond yield on government debt are common, and some also look at the risk-free rate as a baseline. Earnings yield is also distinct from the dividend yield, which measures cash actually paid out to shareholders. A company may reinvest much of its earnings instead of paying them out, so its earnings yield can be well above its dividend yield.

Limitations

Earnings yield has real limits. Reported earnings can be shaped by accounting choices, one-time gains or losses, and the phase of an economic cycle, so a single year's figure may not reflect normal profitability. It also ignores debt and does not show how much cash a business generates. A high earnings yield can signal a bargain, but it can also reflect market doubts about the company's future. For this reason, earnings yield is usually read alongside other measures rather than on its own.