Earnings Yield

Earnings yield expresses the P/E ratio as a percentage return, making it directly comparable to bond yields, cash rates, and other asset class returns. A stock with P/E of 15 has an earnings yield of 6.7%.

This simple inversion transforms the metric from "how expensive is this stock" into "what return does this stock offer at the current price." The latter framing is more intuitive for asset allocation decisions.

The spread between earnings yield and the risk-free rate (usually the 10-year Treasury) forms the equity risk premium - one of the most important variables in finance. A wide spread suggests stocks are cheap relative to bonds; a narrow or negative spread suggests the opposite.

Higher earnings yield means a cheaper stock. An earnings yield above 7% (P/E below ~14) is historically attractive for mature, profitable companies.

Comparing earnings yield to the 10-year Treasury yield gives a quick read on relative value. When equities yield 6% and Treasuries yield 4%, the equity risk premium is 2% - historically narrow. When the spread is 4%+, stocks are priced attractively relative to bonds.

Greenblatt's Magic Formula uses EBIT/EV rather than EPS/Price, but the concept is identical. Greenblatt's version is capital-structure neutral, while standard earnings yield reflects the equity holder's perspective only.

Stable, slow-growth sectors (utilities, consumer staples, telecoms) typically offer earnings yields of 5-8%, comparable to their low-risk profiles.

Growth sectors (technology, healthcare) often show earnings yields below 3%, reflecting the market's expectation that future earnings will be much higher than current earnings.

Financial companies can show high earnings yields, but these must be interpreted cautiously because bank earnings are sensitive to credit cycles and provision timing.