What is earnings yield and how is it calculated?
Earnings yield is the reciprocal of the price to earnings ratio. The price to earnings ratio is the current market price divided by the current earnings. For example, say you have a stock trading for $40 per share with earnings of $2 per share. The price to earnings ratio is calculated as follows: P.E. Multiple= price/earnings — or — $40/$2= the P.E. Multiple of 20. If we know the P.E. multiple, we can find the earnings yield by taking the reciprocal of that number: 1/20=.05 or an earnings yield of 5%. The earnings yield is often compared with the yield on bonds to assess the relative attractiveness of investments in bonds versus stocks.
