Earnings yield

Earnings yield is the inverse of the PE ratio, and is used in much the same way. It tells an investor the same thing. It is:

EPS ÷share price

So a share that cost 200p and had an EPS of 10p would be on a PE of 20 and would have an earnings yield of 5%.

PE is more widely used and discussed and it is therefore what most investors prefer to use out of sheer familiarity. Earnings yield is more consistent with other measures that are used such as dividend yield, bond yields and interest rates.

It can also be illuminating to invert (divide one by the ratio) other valuation ratios such as EV/EBITDA and price/cash flow. Inverting price/free cash flow is particularly interesting as it tells you what the yield would be if the company paid out as much as it could in dividends without affecting existing operations. It gives the cash return the company makes for shareholders, including what it retains as well as what is actually paid out.

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