Earnings Yield

The percentage of a company's earnings per share relative to its stock price, calculated as the inverse of the P/E ratio.

Earnings yield is a valuation metric that represents the percentage of a company's earnings per share relative to its current stock price. It is the mathematical inverse of the widely used Price-to-Earnings (P/E) ratio. While the P/E ratio tells an investor how many dollars they must pay for every dollar of earnings, the earnings yield shows how much the company earned per share for every dollar invested in the stock. Investors calculate this metric to easily compare the expected return of equity investments against fixed-income instruments, such as government bonds. For example, comparing a stock's earnings yield to the yield of a 10-year Treasury bond helps investors determine whether the potential return of the stock justifies taking on the higher risk associated with equities. Generally, a higher earnings yield suggests that a stock may be undervalued or that its earnings power is strong relative to its market price. However, a high earnings yield can sometimes be a value trap if the company's earnings are expected to decline sharply in the future. Conversely, a low earnings yield might indicate that a stock is overvalued, or it could reflect a high-growth company whose future earnings are expected to expand rapidly.

If Company A has earnings per share (EPS) of $3.00 and its stock is trading at $50.00, its earnings yield is calculated as $3.00 / $50.00 = 0.06, or 6.00%. This means that for every $100 invested in the stock, the company generated $6.00 in earnings.