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Earnings yield calculator

By Jude Wallis

Earnings yield is earnings per share divided by price, which is the P/E ratio turned upside down. $2.50 of earnings on a $50 share is a 5 percent earnings yield and a P/E of 20.

Earnings yield

5.00%

The reciprocal of a 20.00 P/E on $2.50 of earnings.

EPS
$2.50
Price
$50.00
Earnings yield
5.00%
Price to earnings
20.00
$
$

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The formula

earnings yield=EPSP=1P/E\text{earnings yield}=\frac{\text{EPS}}{P}=\frac{1}{P/E}

EPS is earnings per share for the year and PP is the share price. The reciprocal of the same two numbers is the price to earnings ratio.

One ratio, two directions

Price over earnings answers how many years of current profit you are paying for. Earnings over price answers what percentage of your money the business earns each year. $2.50 against $50 gives 2.5/50=0.052.5 / 50 = 0.05, a 5 percent earnings yield, and 50/2.5=2050 / 2.5 = 20, a P/E of 20.

The reason to flip it is comparison. A P/E of 20 cannot be compared to a bond yielding 5 percent without doing arithmetic in your head. A 5 percent earnings yield can be compared immediately, which is exactly what the flip is for.

Earnings are not cash in your hand

A 5 percent earnings yield does not mean 5 percent arrives in your account. The company keeps some of it, reinvests some, and pays out the rest as a dividend. Earnings yield measures what the business earns on your behalf; dividend yield measures what it sends you.

That gap is the point of the comparison rather than a flaw in it. A company earning 10 percent and paying nothing may be worth more than one earning 5 percent and paying it all, and the two yields are how you see the split. Dividend yield against earnings yield sets them next to each other.

A cheaper share earns a higher yield

Halve the price and double the earnings and the yield moves a long way. $4 of EPS on a $40 share is 10 percent, with a P/E of 10. The same business at twice the price would yield 5 percent. Nothing changed except what you paid.

This makes earnings yield useful against a risk free rate: if a share yields less on its earnings than a government bond pays in coupons, all of the case for owning it has to come from growth. The price to earnings calculator runs the same numbers the other way up.

The scope of the number

Earnings yield is one year of accounting profit over one share price. It is at its most useful as a first comparison against another yield, then refined with cash flow and growth. P/E against earnings yield covers when each direction reads better. This is educational material, not financial advice.

Worked examples

\$2.50 of EPS on a \$50 share

A company earns $2.50 per share and the shares trade at $50. What are the earnings yield and the P/E?

  1. Earnings yield: 2.5/50=0.052.5 / 50 = 0.05, which is 5 percent.
  2. Price to earnings: 50/2.5=2050 / 2.5 = 20.
  3. The two are reciprocals, so 1/20=0.051 / 20 = 0.05 again.

The earnings yield is 5 percent and the P/E is 20, from $2.50 of EPS and a $50 price.

Higher earnings, lower price

A second company earns $4 per share and trades at $40. What are the earnings yield and P/E?

  1. Earnings yield: 4/40=0.104 / 40 = 0.10, which is 10 percent.
  2. P/E: 40/4=1040 / 4 = 10, half the multiple of the first company.

The earnings yield is 10 percent and the P/E is 10. Twice the earnings yield of the $50 share, for the same reason its multiple is half.

Reading earnings yield as income received

A 5 percent earnings yield is what the business earns per dollar of share price, not what it pays you. The cash actually sent out is the dividend yield, which on a $50 share paying nothing is zero while the earnings yield is still 5 percent.

Common questions

Why flip the P/E at all?

Because a percentage can be compared directly to a bond yield or a savings rate. A multiple cannot.

Which earnings should go on top?

Trailing earnings measure what happened; forward estimates measure what is expected. Say which one the number came from.

Is this financial advice?

No. It is educational material showing the reciprocal relationship between P/E and earnings yield.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.