Earnings Yield Formula & Example

Definition: Earnings Yield is the ratio of earnings per share (EPS) to the stock market price. It can also be calculated by taking the inverse of the P/E ratio and turning it into a percentage. A high earnings yield indicates the stock is undervalued, and a low earnings yield will indicate the stock is overvalued.

Formula:
Earnings Yield = (Earnings per share / Market price per share) * 100%
Or,
Earnings Yield = (Net Profit / Market Capitalization) * 100%

Example 1:
If a stock has a P/E ratio of 4, then its earnings yield would be: 1/4, which is 0.25 or 25%.

Example 2:
Calculate the Earnings Yield, given the following figures:
Ordinary shares of $1 each: $500,000
6% Preference shares of $1 each: $200,000
10% Debentures $90,000
Net profit after tax $612,000
Ordinary share dividends $50,000
Preference share dividends $12,000
Price per ordinary share $3.20

Solution:
Earnings per share
= (Net profit after tax − Preference dividend) / No. of ordinary shares
= (612,000 - 12,000) / 500,000 = $1.20
Earnings Yield = (1.20 / 3.20) * 100% = 37.5%

* Next: Dividend Yield Ratio Examples
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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