65-Day Academy · Day 15 · Fundamentals
The Earnings Yield — P/E's Honest Twin
Flip the ratio
P/E 25 = earnings yield 1/25 = 4%. That is directly comparable to bond yields: a stock at 4% earnings yield vs a Treasury at 4.5% means the bond pays more per dollar of price — the stock must grow earnings to win. This single flip (price÷E → E÷price) makes stocks comparable to every other asset.
The Fed-model caveat
Earnings yield is nominal and pre-tax-ish; bond coupons are nominal and taxable — the comparison is rough, not exact. And a stock's earnings GROW (usually) while a bond's coupon is fixed. The right mental model: earnings yield is the STARTING return; growth and multiple changes adjust it. A 4% yield + 8% growth + no re-rating ≈ 12% annual return, minus risk.
What you'll practise
A stock trades at $120 with EPS of $6. A Treasury yields 4%. What is the stock's earnings yield (%)?
15 XP in the app · introductory
Sources
- Earnings YieldInvestopedia
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All lessons are for educational purposes only and are not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk and are not suitable for every investor.