# Earnings Yield: The Inverse of the P/E Ratio

Understand earnings yield, how it relates to the P/E ratio, and why comparing it with bond yields or interest rates requires caution about growth, risk, and earnings quality.

Canonical: https://wiki.fcontext.com/stocks/earnings-yield/
Fact checked: 2026-07-14

> For educational purposes only; not investment advice.

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## Direct answer

**Earnings yield** measures earnings per share relative to stock price:

`earnings yield = EPS ÷ share price`

It is the inverse of the P/E ratio. A stock with a P/E ratio of 20 has an earnings yield of 5%.

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## How it works

Earnings yield turns a valuation multiple into a percentage, which can make comparisons easier. Investors may compare it with other stocks, the company's history, bond yields, or interest rates.

But earnings yield is not the same as a cash yield. Companies can retain earnings, reinvest them, repay debt, buy back stock, or pay dividends. Earnings can also be cyclical, adjusted, or affected by one-time items.

The input matters. A trailing earnings yield uses past EPS. A forward earnings yield uses estimated future EPS and depends on forecasts.

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## Example

A stock trades at $50 and reports diluted EPS of $4.

`$4 ÷ $50 = 8%`

The same stock has a P/E ratio of:

`$50 ÷ $4 = 12.5`

An 8% earnings yield does not mean the investor will receive 8% in cash. It means the company earned an amount equal to 8% of the current share price under that EPS measure.

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## Risks

- **Cyclical earnings:** Peak-cycle profits can make a stock look cheap.
- **Low-quality earnings:** EPS may not be supported by cash flow.
- **Forecast risk:** Forward earnings yield can change quickly when estimates fall.
- **Leverage risk:** A high earnings yield can reflect financial distress.
- **Bad comparison:** Equity earnings are riskier and less certain than Treasury interest payments.

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## Common misconceptions

A high earnings yield is not automatically a bargain.

Comparing earnings yield with a bond yield is useful only if risk, growth, and cash conversion are considered.

Negative or very volatile earnings make the metric hard to interpret.

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## Related topics

- [P/E Ratio](/stocks/pe-ratio/)
- [Earnings per Share](/stocks/eps/)
- [Earnings Quality](/stocks/earnings-quality/)

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## Sources

- SEC and Investor.gov: financial-statement and P/E ratio guidance.