Earnings Yield
Earnings yield is the price-to-earnings ratio turned upside down. Expressed as a percentage, it becomes far easier to compare against other options.
Why this matters for beginners
A multiple of 25 means little on its own. An earnings yield of four percent can be compared directly with a bond yield or a savings rate.
Main explanation
Earnings yield is earnings per share divided by price, expressed as a percentage. A price-to-earnings ratio of 20 equals a five percent earnings yield.
The comparison is useful but incomplete. Company earnings can grow, while a bond coupon is fixed, so a lower earnings yield can still be the better long-term outcome.
The yield is only as good as the earnings figure. A depressed or unusually strong year produces a misleading yield, so a normalised figure is better.
Using free cash flow instead of earnings gives a cash-based version of the same idea, which is often more reliable for capital-heavy companies.
Example using a real company
A share priced at 50 with earnings per share of 2.50 has a five percent earnings yield, comparable to a bond paying five percent but with variable outcomes.
- →Price-to-earnings of 10 equals a ten percent earnings yield.
- →Price-to-earnings of 40 equals a 2.5 percent earnings yield, which demands growth to be attractive.
Common beginner mistakes
- ✕Comparing earnings yield with bond yields as if both were fixed.
- ✕Using a single unusual year of earnings.
- ✕Ignoring debt when comparing yields across companies.
Key terms
- Earnings yield
- Earnings per share divided by the share price.
- Normalised earnings
- Earnings adjusted to a typical year.
- Free cash flow yield
- Free cash flow per share divided by the share price.
Key takeaways
- 01Earnings yield makes multiples comparable across options.
- 02Growth potential is what makes it different from a bond yield.
- 03Normalise the earnings figure before drawing conclusions.
Check yourself
- 01A price-to-earnings ratio of 20 corresponds to a five percent earnings yield.
- 02Earnings yield and bond yield are directly equivalent.
- 03Using one unusual year of earnings distorts the yield.
Try the concept on a real company
Open a stable company in the Analyzer and convert its earnings multiple into a yield, then ask what growth would justify it.
Educational examples only. Not buy or sell recommendations.