Earnings Yield

Earnings yield flips the P/E ratio upside down: earnings per share divided by price, expressed as a percentage. A stock at a P/E of 20 has an earnings yield of 5% — the company earns five cents a year for every dollar of stock you own.

The inversion exists to make stocks comparable with bonds. If the 10-year Treasury pays 4.5% and a stock's earnings yield is 5%, the equity offers only a half-point premium for taking equity risk — but unlike a coupon, earnings can grow. This stock-versus-bond framing (sometimes called the Fed model) drove the "no alternative to stocks" argument of the 2010s, when near-zero Treasury yields made even a 3% earnings yield look generous.

Quant screens often use a variant: EBIT divided by enterprise value, which neutralizes debt and cash differences between companies. That version is the "cheapness" half of Joel Greenblatt's Magic Formula ranking.