Definition
Earnings yield is the inverse of the P/E ratio, expressing the percentage of each dollar invested that was earned by the company. It allows direct comparison with bond yields: if a stock's earnings yield exceeds the bond yield, the stock may offer better value (the "Fed Model" concept). Earnings yield is useful for cross-asset class comparisons.
functions Formula
Earnings Yield = EPS / Share Price × 100% = 1 / P/E × 100%
lightbulb Example
Stock trades at $40 with EPS of $4. Earnings yield = 10%. This compares favorably to the 4% 10-year Treasury yield, suggesting stocks offer better risk-adjusted returns.
verified_user Key Points
- Inverse of P/E ratio
- Enables direct comparison with bond yields
- Higher yield = cheaper relative valuation
- Fed Model compares earnings yield to Treasury yield