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What is Earnings Yield (EY)?

Earnings Yield is the inverse of the P/E ratio, expressed as a percentage. It allows direct comparison between stock yields and bond yields. Joel Greenblatt popularized the EBIT/EV version of earnings yield in the Magic Formula as it accounts for capital structure differences between companies. Higher earnings yield = cheaper stock relative to earnings power.

Formula

Earnings Yield = EPS / Share Price = 1 / P/E Ratio | Magic Formula: EBIT / Enterprise Value

Earnings Yield vs. the "Fed Model"

The Fed Model compares the S&P 500 earnings yield (aggregate EPS / index price) to the 10-year Treasury yield. When the earnings yield exceeds the Treasury yield, equities are considered relatively cheap -- you receive more earnings per dollar invested in stocks than per dollar in bonds. When Treasury yields exceed earnings yields, bonds offer better current return. While the Fed Model has been criticized for comparing nominal bond yields to real earnings yields (an apples-to-oranges comparison), it remains widely referenced as a shorthand for relative valuation between asset classes.

At the individual stock level, earnings yield is most powerful when combined with a quality filter. A stock with a 12% earnings yield (P/E of ~8x) might be cheap for good reason -- declining earnings, balance sheet stress, or industry disruption. The Piotroski F-Score serves as an effective quality filter: high earnings yield + F-Score of 7+ screens for cheap companies with improving fundamentals, eliminating many of the value traps that make raw P/E or earnings yield screens underperform.

Calculate Enterprise Value

Enterprise Value is the denominator in Greenblatt's EBIT/EV earnings yield. Understand how EV is calculated and why it improves on simple market cap.

Learn About Enterprise Value →

Frequently Asked Questions

What is earnings yield and how does it relate to the P/E ratio?+
Earnings Yield = EPS / Price = 1 / P/E Ratio. A stock with a P/E of 20x has an earnings yield of 5% (1/20 = 0.05). A stock with a P/E of 10x has an earnings yield of 10%. The key advantage of expressing valuation as a yield is comparability: a 5% earnings yield can be directly compared to a 4% Treasury bond yield or a 3% dividend yield. This comparison is the foundation of the "Fed Model" and related equity valuation frameworks. When earnings yield substantially exceeds bond yields, equities are considered cheap on a relative basis; when bond yields exceed earnings yield, bonds may be more attractive on a current income basis.
When does earnings yield beat bond yield and what does it signal?+
Historically, stocks have tended to outperform bonds when earnings yield exceeds the 10-year Treasury yield by 2 or more percentage points -- the "equity risk premium" threshold. The intuition: if a stock with an earnings yield of 8% is compared to a 10-year Treasury at 4.5%, the stock is offering a 3.5 percentage point premium to take on equity risk, which historically has been more than sufficient compensation. Conversely, when earnings yields compress below Treasury yields (as happened in the late 1990s and again in 2021), equities are priced to deliver below-average forward returns. Earnings yield is most useful as a market-level valuation signal when viewed over rolling 10-year periods.
What is EBIT/EV earnings yield and why does Greenblatt use it?+
Joel Greenblatt's Magic Formula uses EBIT divided by Enterprise Value rather than EPS divided by Price. This version of earnings yield has two important advantages. First, it uses EBIT (operating earnings) rather than net income, eliminating the distortions of different tax rates, interest expense levels, and one-time items that affect the bottom line. Second, it uses Enterprise Value (market cap + net debt) rather than just market cap, which means it accounts for how a company is financed -- a highly leveraged company has a lower EV relative to its equity market cap, appropriately reflecting the risk embedded in its capital structure. EBIT/EV allows apples-to-apples comparison of companies with different capital structures and is more useful for cross-industry screening than the basic P/E inverse.
How do you use earnings yield in a practical value screening strategy?+
Greenblatt's Magic Formula screens for the highest EBIT/EV (cheapest on earnings yield) combined with the highest ROIC (Return on Invested Capital) -- seeking companies that are both cheap and high-quality. In practice, earnings yield > 6% serves as a reasonable starting threshold for undervaluation (equivalent to a P/E below ~17x on a normalized basis). For additional quality filtering, combine earnings yield with Piotroski F-Score >= 7 to eliminate financially distressed companies that are cheap for good reason. The most robust screen combines: EBIT/EV > 8%, ROIC > 15%, Piotroski F-Score >= 7, and no recent insider selling. This combination historically captures genuine value with earnings quality validation.

Related Terms

Price-to-Earnings Ratio

Market price divided by earnings per share

Enterprise Value

Total acquisition cost including net debt

ROIC

Return on all capital deployed

Piotroski F-Score

9-point financial strength scoring system

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