What is the formula for earnings yield?

The formula for earnings yield is Earnings Yield = 100% * (earnings per share / market price per share).

This financial metric serves as a valuable tool for investors, providing insight into a company's profitability in relation to its stock price. It offers an alternative perspective to the commonly used Price-to-Earnings (P/E) ratio, essentially being its inverse.

Understanding the Earnings Yield Formula

The earnings yield measures the earnings generated per dollar of a company's market capitalization. It is calculated by taking a company's earnings per share (EPS) and dividing it by its current market price per share, then multiplying the result by 100% to express it as a percentage.

Based on the provided reference, the specific components of the formula are:

• Earnings Per Share (EPS): This value is obtained from the company's most recent income statement. It represents the portion of a company's profit allocated to each outstanding share of common stock.
• Market Price Per Share: This is simply the current stock price of the company in the market.

The exact formula, as stated, is:

**Earnings Yield = 100% * (earnings per share / market price per share)**

By reporting the yield in percentage terms, it becomes straightforward to compare the earnings power across different companies or against other investment opportunities.

Practical Applications and Insights

The earnings yield offers several practical benefits and insights for investors:

• Valuation Metric: It functions as the inverse of the P/E ratio. A higher earnings yield suggests that a company is generating more earnings relative to its share price, which could indicate an undervalued stock or a potentially attractive investment opportunity for value-oriented investors.
• Comparison Tool: It allows for a direct comparison of a stock's earnings power against other investment options, such as bond yields or other stocks in the market. For instance, an investor might compare a stock's earnings yield to the yield of a risk-free asset (like a U.S. Treasury bond) to assess its relative attractiveness and potential for return.
• Investment Decision Making: Companies consistently showing a high earnings yield may be particularly appealing to investors seeking stocks that generate substantial earnings in proportion to their market price, aligning with strategies focused on value and income.

Example Calculation

To illustrate the calculation of earnings yield, let's consider a practical example:

Suppose a company, "Tech Innovators Inc.", reports the following financial data:

• Earnings Per Share (EPS) = $4.00
• Market Price Per Share = $80.00

Using the earnings yield formula:

Earnings Yield = 100% * ($4.00 / $80.00)
Earnings Yield = 100% * (0.05)
Earnings Yield = 5%

This result indicates that for every $100 invested in Tech Innovators Inc.'s stock, the company generates $5 in annual earnings.

Key Components Overview

For a clear understanding, here is a summary of the fundamental elements of the earnings yield formula: