earnings yield
The inverse of the P/E ratio — earnings per share divided by stock price — expressing earnings as a percentage of price for comparison with bond yields.
Example
“At a P/E of 20, the earnings yield was 5% — comparable to bond yields and suggesting stocks weren't obviously cheap.”
Memory Tip
EARNINGS YIELD = 1 ÷ P/E ratio. Lets you compare stocks to bonds on the same percentage basis.
Why It Matters
Earnings yield helps you compare whether a stock offers better returns than bonds or other fixed-income investments. It lets you evaluate if a company is cheap or expensive relative to the profits it actually generates, making it easier to decide if a stock is worth buying at its current price.
Common Misconception
Many people think a high earnings yield automatically means a stock is a good investment, but they forget that this ratio only shows current earnings and does not account for whether those earnings will grow, shrink, or disappear in the future. A high yield might actually indicate a struggling company that the market expects to decline.
In Practice
If a company has earnings per share of five dollars and the stock trades at one hundred dollars, the earnings yield is five percent. You could then compare this five percent return to what you might earn from a bond yielding three percent, helping you decide which investment better fits your financial goals and risk tolerance.
Etymology
EARNINGS (profit) YIELD (return as percentage). Expressing EARNINGS as a percentage YIELD.
Common Misspellings
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See Also
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