What Is Earnings Yield? Formula and How It Compares to P/E and EPS

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Earnings yield is a company’s earnings per share divided by its current share price, expressed as a percentage. The earnings yield formula is the price-to-earnings (P/E) ratio turned upside down: instead of asking how many dollars investors pay for one dollar of earnings, it asks how many cents of earnings each dollar of share price buys. A stock trading at 20 times earnings has an earnings yield of 5%. Because the result is a percentage, it can be set beside a bond yield, a savings rate or another stock’s yield in a way the P/E multiple cannot.

The Earnings Yield Formula

From EPS and price

The basic calculation uses two inputs:

Earnings Yield = Earnings Per Share (EPS) ÷ Share Price × 100%

EPS is usually net income attributable to common shareholders divided by shares outstanding. Many data providers use diluted EPS, which counts shares that options, warrants and convertible securities could create. Diluted EPS is lower than basic EPS when those securities exist, so the earnings yield built on it is lower too. Use the same EPS definition for every stock you compare.

As the reciprocal of P/E

The P/E ratio is price divided by EPS. Flipping that fraction gives EPS divided by price, which is the earnings yield:

Earnings Yield = 1 ÷ (P/E)

This is why the two always move in opposite directions. A P/E of 10 converts to 1 ÷ 10 = 0.10, or 10%; a P/E of 25 converts to 1 ÷ 25 = 0.04, or 4%. If you already know a stock’s P/E ratio, you do not need its EPS or price to find the earnings yield.

At the company level

The same ratio can be calculated for the whole company rather than per share:

Earnings Yield = Net Income ÷ Market Capitalization

Because the share count cancels, this matches the per-share version (apart from differences in share counts used for diluted EPS). Likewise, P/E = market cap ÷ net income. Market cap ÷ EPS does not give P/E, because it mixes a company-wide figure with a per-share figure.

Trailing vs. forward earnings yield

The choice of earnings period changes the number:

• Trailing earnings yield uses EPS for the last four reported quarters (trailing 12 months, or TTM). It rests on reported results but looks backward.
• Forward earnings yield uses estimated EPS for the current or next fiscal year. It reflects expectations, which may turn out to be wrong.

For a company whose profits are growing, forward EPS is higher than trailing EPS, so the forward earnings yield is higher than the trailing one at the same price. Mixing a trailing figure for one stock with a forward figure for another produces a misleading comparison.

Worked Example

The following figures are hypothetical and chosen to show the arithmetic.

Stock A trades at $10. Its trailing 12-month EPS is $0.50.

• P/E = $10 ÷ $0.50 = 20
• Earnings yield = $0.50 ÷ $10 = 5%

Stock B trades at $20. Its trailing 12-month EPS is $2.00.

• P/E = $20 ÷ $2.00 = 10
• Earnings yield = $2.00 ÷ $20 = 10%

Stock B’s share price is twice Stock A’s, yet it is cheaper relative to earnings: each dollar invested buys 10 cents of annual earnings, against 5 cents for Stock A. If the two companies have similar industries, growth prospects, risk and balance sheets, Stock B offers more earnings for the money. If Stock A is expected to grow much faster, its lower earnings yield may simply reflect that expectation, and the analysis has to go beyond the ratio.

How Earnings Yield Relates to P/E and EPS

The three metrics are built from the same two numbers, price and earnings, but each answers a different question.

• EPS is a profitability measure. It tells you how much profit the company generated for each share. It does not involve the share price at all, so it cannot tell you whether a stock is cheap or expensive. See how EPS is calculated for basic and diluted versions.
• P/E is a valuation multiple. It tells you how many dollars the market is paying for each dollar of EPS.
• Earnings yield is the same valuation expressed as a rate: the earnings generated per dollar of price.

The relationship between EPS and P/E can be written as Price = EPS × P/E. Multiplying a stock’s EPS by its P/E therefore gives back its share price, and dividing the price by the P/E gives back the EPS. This also explains how a share price can rise without any change in profits: if EPS stays at $2.00 and the market’s P/E moves from 10 to 15, the price moves from $20 to $30, and the earnings yield falls from 10% to 6.67%.

EPS and earnings yield are often confused because both are “per” measures of earnings, but EPS is a dollar amount per share and earnings yield is a percentage per dollar of price. Two companies with identical EPS of $3.00 have earnings yields of 10% at a $30 share price and 2% at $150.

P/E comparisons that also apply to earnings yield

Because earnings yield is the inverse of P/E, the standard ways of putting a P/E in context carry over:

• Against sector peers: a yield below that of similar companies and the sector average signals a premium; a yield above it signals a discount.
• Against its own history: a yield that is high compared with the stock’s past range may mean investors believe growth has peaked, not that the stock is a bargain.
• Against growth (the PEG ratio): the PEG ratio divides P/E by the earnings growth rate. A P/E of 10 with 10% growth gives a PEG of 1; with 20% growth it gives 0.5, which on this measure looks cheaper relative to its growth.

A stock screener can filter by P/E, which is the same as screening by earnings yield with the threshold inverted (a P/E below 12.5 is an earnings yield above 8%).

Comparing Earnings Yield With Bond Yields

The main practical use of earnings yield is putting stocks and fixed income on the same scale. A P/E of 10 is hard to set beside a bond yielding 6%, but an earnings yield of 10% shows the four-percentage-point gap immediately.

Hypothetical case: an investor choosing between Stock B (earnings yield 10%) and a high-yield corporate bond paying 6% must decide whether four extra percentage points of earnings justify the risk of owning equity rather than debt. At the market level, the earnings yield of an index such as the S&P 500 is often set against the yield on long-term Treasury bonds. The gap is one rough estimate of the equity risk premium, the extra return investors demand for holding stocks.

The comparison has structural limits:

• A bond’s yield is a contractual payment, assuming no default. An earnings yield is an accounting figure with no promise attached.
• A bond’s coupon is fixed in nominal terms, while a company’s earnings can grow, shrink or turn negative. Over long periods, earnings may also rise with prices generally, something a fixed coupon cannot do, which matters when inflation is high.
• The investor in Stock B may receive only part of the 10% as dividends. A stock with a 4% dividend yield and a 10% earnings yield retains the rest, and whether that retained profit turns into share price gains is uncertain.

Earnings Yield, Growth and Expected Return

Earnings yield is sometimes treated as an estimate of a stock’s expected return. That is only true under a specific assumption.

If a company paid out all its earnings and never grew, its share price would equal next year’s EPS divided by the investor’s required return (P = EPS₁ ÷ r). Rearranging gives r = EPS₁ ÷ P, which is the forward earnings yield. For a no-growth company, earnings yield and required return are the same thing.

For companies with growth opportunities, the price includes an extra component, the present value of growth opportunities (PVGO):

P = EPS₁ ÷ r + PVGO

Here EPS₁ ÷ r is the value of the company’s current earnings stream with no growth, and PVGO is what the market pays on top for expected future investment. A large PVGO pushes the price up and the earnings yield down, so a growth stock’s earnings yield understates the return investors expect from it.

Earnings Yield and the Dividend Payout Ratio

The dividend payout ratio is dividends per share (DPS) divided by EPS. It shows what share of profit is paid to shareholders and is a common check on whether a dividend is sustainable: a company that pays out more than it earns year after year may have to cut the dividend.

Dividing both DPS and EPS by the share price gives a shortcut:

Payout Ratio = (DPS ÷ Price) ÷ (EPS ÷ Price) = Dividend Yield ÷ Earnings Yield

This lets you find the payout ratio from two figures that are quoted almost everywhere, the dividend yield and the P/E, without looking up per-share dividends and earnings. Hypothetical example: a stock with a 5% dividend yield and a P/E of 15 has an earnings yield of 1 ÷ 15 = 6.67%. Its payout ratio is 5% ÷ 6.67% ≈ 75%. The remaining 25% of earnings is retained in the business.

Where the dividend yield exceeds the earnings yield, the payout ratio is above 100%: the company is paying more in dividends than it reported in earnings for that period.

Limitations of Earnings Yield

Volatility. Business cycles, one-time charges or asset sales can swing net income sharply from year to year, so earnings yields move much more than bond yields. A single unusual year can make a stock look very cheap or very expensive.

Negative or tiny earnings. Negative EPS gives a negative earnings yield and a P/E that is not meaningful. EPS close to zero gives an enormous P/E but an earnings yield near zero. Earnings yield handles this better than P/E, ranking loss-makers below profitable companies, but it still says little about a company that is temporarily unprofitable.

Accounting choices. EPS depends on depreciation methods, write-downs, stock-based compensation and other accounting decisions. Two companies with the same economics can report different earnings and therefore different yields.

Capital structure. The standard earnings yield ignores debt. A heavily indebted company can show a high earnings yield because its equity is cheap relative to earnings, while carrying more risk than a debt-free peer. Some investors use an enterprise-value version, EBIT ÷ enterprise value, which includes debt in the denominator and measures earnings before interest and taxes.

Indicative return only. Earnings yield shows earnings per dollar of price, not what the shareholder receives, which matters most for companies paying small or no dividends. Hypothetical example: Widget Co. trades at $10, its book value per share, and earns $1 over the coming year without paying a dividend, lifting book value to $11. If the stock keeps trading at book value, it rises to $11, a 10% return matching the earnings yield. If a glut of widgets pushes the stock to a steep discount to book value, the shareholder could lose money despite the company earning 10% on the share price. Had Widget Co. paid the full $1 as a dividend, the 10% would have reached the investor in cash.

Related measures

• Cyclically adjusted earnings yield: the inverse of the CAPE ratio, which uses average inflation-adjusted earnings over ten years to smooth out cyclical swings.

FAQs

The Bottom Line

Earnings yield helps investors who want to compare stocks with bonds or with each other on the same percentage scale. It works best when every stock uses the same EPS definition and period, and when growth, debt and earnings swings are checked separately. For growth companies and low-dividend payers, the figure shows earnings per dollar of price, which can differ from the return a shareholder actually receives.