What it is
Earnings per share divided by share price. Inverse of P/E. A P/E of 20 = 5% earnings yield (1/20 = 0.05).Why it's useful
Earnings yield is in the same units as a bond yield. A stock at 8% earnings yield generates 8 cents of profit per dollar invested per year — directly comparable to a 4% Treasury bond.Buffett: "Stocks are in essence long-term bonds whose coupons are what the business actually earns." The earnings-yield framing makes that comparison explicit.
How to use it
- Earnings yield > 2× risk-free rate = potentially cheap. The "spread" compensates for equity risk.
- Earnings yield < risk-free rate = the stock is pricing in significant growth. The growth has to actually materialise for the investment to make sense.
- The S&P 500's earnings yield over time has roughly tracked the 10-year Treasury yield + 3% equity risk premium.
Variants
- Owner Earnings Yield = Owner Earnings / Market Cap (Buffett's preferred version)
- FCF Yield = Free Cash Flow / Market Cap (the cleanest cash-based measure)
- EBIT Yield = EBIT / Enterprise Value (capital-structure-neutral)