Earnings Yield: Flipping P/E to Compare With Interest Rates
Earnings yield is EPS divided by price — the inverse of P/E. We explain why it lets you compare stocks directly against bonds and savings rates.
How much does a stock "pay" in percent?
With a savings deposit you instantly know the interest rate in percent. But a stock with a P/E of 20 — how much does it "pay"? Earnings yield converts P/E into a percentage so you can compare it directly with interest rates and bonds.
How to calculate it: flip the P/E
Earnings yield = EPS divided by Share price = 1 divided by P/E
Example: P/E = 20, so earnings yield = 1/20 = 5%. P/E = 10, so earnings yield = 10%. The higher the P/E, the lower the earnings yield (the more "expensive" the stock in earnings-per-price terms).
This number says: for every dollar you spend buying the stock, how many dollars of profit the business generates per year (though not all of it is paid to you — the paid part is the dividend, the retained part is reinvested).
Why earnings yield is useful
Its biggest advantage is being easy to compare with other options:
- Against bonds: if earnings yield is 5% while government bonds pay 4%, the 1% gap is the "risk premium" you get for choosing stocks.
- Against savings rates: an earnings yield far below bank rates means the stock may be expensive relative to a safe option.
- Against Fed rates: when rates rise, the earnings yield that counts as "worth buying" must rise too, pulling stock valuations down.
This is why many investors compare earnings yield with bond yields to gauge whether the market is cheap or expensive.
Limits
- Based on accounting profit: earnings can be distorted by one-off items. Cross-check with free cash flow (FCF yield) for the real-cash picture.
- One year of earnings may not be representative: use cyclical or multi-year average earnings for volatile businesses.
- Not a replacement for full valuation: earnings yield is a starting point, not a conclusion — combine it with PEG and intrinsic value.
Conclusion
Earnings yield is EPS divided by price, the inverse of P/E, turning valuation into a percentage that compares easily with bonds and interest rates. A high P/E means a low earnings yield means an expensive stock in earnings-per-price terms. Use it to sense how stocks relate to other options, but always verify with real cash flow.
Next step
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