====== Earnings Yield ======
Earnings Yield is a simple yet powerful tool that flips the famous [[P/E Ratio]] on its head to reveal what a company is earning relative to its stock price. Think of it as the //profitability punch// of your investment. Calculated as the company's annual [[Earnings Per Share (EPS)]] divided by the current price of a single share, the result is expressed as a percentage. For example, if a company earned €2 per share last year and its stock is trading at €20, its earnings yield is 10% (€2 / €20). This handy metric tells you what percentage of your investment is being returned to you in the form of profits each year. It's a fantastic way for value investors to quickly gauge a stock's cheapness and compare its potential return not just to other stocks, but also to the much safer world of [[bonds]]. It asks a fundamental question: "For every dollar or euro I put into this stock, how much profit is the business generating for me?"
===== The Investor's Perspective =====
==== The Inverse of the P/E Ratio ====
If you've ever found the P/E ratio a bit abstract, you'll love the earnings yield. They are two sides of the same coin. The earnings yield is simply the reciprocal of the P/E ratio (1 / P/E).
  * A stock with a P/E of 10 has an earnings yield of 10% (1 / 10).
  * A stock with a high P/E of 40 has a much lower earnings yield of 2.5% (1 / 40).
Viewing valuation this way can be more intuitive. A 10% yield feels much more tangible than a "P/E of 10." It instantly provides a benchmark for comparison. Would you be happy with a 2.5% return on your investment if you could get 4% from a government bond with virtually no risk? The earnings yield frames the decision in these practical terms.
==== A Value Investor's Best Friend ====
Legendary investors like [[Benjamin Graham]] and [[Warren Buffett]] have long championed the concept of thinking about stocks as ownership in a business, not just blips on a screen. The earnings yield fits this philosophy perfectly. It helps you think like a business owner by focusing on the company's profitability relative to your purchase price. In fact, Warren Buffett often compares a stock's earnings yield to the current yield on long-term government bonds, often called the [[risk-free rate]]. If a stable, predictable business offers an earnings yield of 8% when government bonds are yielding only 4%, that stock might be an attractive investment. This simple comparison provides a "margin of safety" by ensuring you're being well-compensated for taking on the additional risk of owning a stock.
===== Putting It Into Practice =====
==== The Simple Calculation ====
There are two common ways to calculate the earnings yield:
  - **Method 1 (Per-Share Basis):**
    Earnings Yield = Earnings Per Share (EPS) / Current Market Price Per Share
  - **Method 2 (Company-Wide Basis):**
    Earnings Yield = Total Net Income / [[Market Capitalization]]
Let's imagine a fictional company, "EuroEspresso Inc." It earned €50 million last year and has 20 million shares outstanding, so its EPS is €2.50 (€50m / 20m). If its stock price is currently €25, the earnings yield is:
€2.50 / €25 = 0.10, or **10%**
This means for every €25 you invest, the business is generating €2.50 in profit for you.
==== Watch Out for These Traps ====
While incredibly useful, the earnings yield isn't a magic wand. You need to use it with a healthy dose of skepticism and a bit of detective work.
  * **The "E" is for 'Examine':** The quality of the earnings number is everything. A company might have unusually high earnings due to a one-time asset sale or an accounting trick. Conversely, a great business might have a temporarily low "E" due to a short-term problem. Always look for [[normalized earnings]] over several years to get a truer picture.
  * **The Cyclical Swings:** For companies in cyclical industries like automotive or construction, earnings can swing wildly. A very high earnings yield at the peak of an economic cycle could be a warning sign that profits are about to fall, making the stock look deceptively cheap.
  * **The [[Value Trap]] Pitfall:** A high earnings yield can sometimes signal a company in terminal decline. The market is pricing the stock cheaply for a reason—because future earnings are expected to shrink or disappear entirely. Always pair a high earnings yield with a qualitative assessment of the business's long-term prospects. Is this a great business on sale, or a melting ice cube?