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Earnings yield is useful for investors who are concerned about the rate of return on an investment. This metric, expressed in percentage, is calculated as annual earnings per share divided by market price the inverse of the price-to-earnings (P/E) ratio.
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While comparing stocks, if other factors are similar, the one with higher earnings yield is considered undervalued. That’s because this metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today.
Earnings yield is not as widely used as the P/E ratio as a valuation metric but investors most commonly compare the earnings yield of a stock to the prevailing interest rates, such as the current 10-year Treasury yield, to get a sense of the return on investment it offers compared to virtually risk-free returns.