Earnings yield

Earnings yield is simply the inverse of P/E, expressed as a percentage. A stock at 25x P/E has a 4% earnings yield; a stock at 10x P/E has a 10% earnings yield. The reason to invert P/E is intuition: a yield is directly comparable to the ten-year Treasury yield and to the company's own cost of capital. If a business consistently earns a 6% earnings yield while its cost of equity is 9%, the equity is destroying value at the current price unless growth makes up the gap. Earnings yield is the foundation of the Fed model and of equity-risk-premium frameworks — both compare it to the risk-free rate to gauge whether equities collectively are cheap or expensive. We use earnings yield as a quick sanity layer on top of P/E in our reports because it forces a direct dialogue with cost of capital. The same caveats apply: trailing earnings can be cyclically inflated or depressed, and earnings yield ignores capital structure, capital intensity, and growth. A normalized, mid-cycle earnings yield computed on through-cycle EPS is the version we prefer for cyclical businesses.