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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