Earnings yield

Earnings divided by price - the price-to-earnings ratio turned upside down. Expresses a share's price as a return, so it can be compared with other uses of the same money.

Example

Earnings of 2.50 on a price of 40 is 6.25%, which is a price-to-earnings ratio of 16.0.

Important

Earnings are not cash received, so this is a comparison tool rather than income. Its value is that it puts a share, a property and a loan into one vocabulary, which a multiple never does.

Related terms

• Price-to-earnings ratio — The price of a share divided by the earnings attributable to it. An equity multiple, because both parts are measured after interest has been paid.
• Dividend yield — The cash dividend paid over a year divided by the current share price - the income return actually received by a holder.
• Capitalisation rate — The required annual return used to convert an income stream into a price, most commonly in property. Value is net operating income divided by the rate.

Lessons that explain it

• Yield-based valuation: pricing the income — Start from the money the asset actually pays out and the return you require, and the price falls out of the division. The simplicity is real, and it conceals the same growth assumption everything else makes. (11 min)
• What each method is for, and what to do when they disagree — Three methods on one asset produce three different answers, and the disagreement is the most useful output. Averaging it away destroys the only thing the exercise produced. (10 min)

All 578 terms in the Investing glossary