Earnings yield

Earnings per share divided by the share price, the reciprocal of the P/E. Still usable when earnings are negative or near zero; in a buyback it is compared with the after-tax cost of funds.

Where you will meet it

Earnings yield appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain earnings yield (E/P) and argue for its use
  CFA Level II · Equities

  “Earnings yield, E ÷ P, is the reciprocal of the P/E ratio.”

• Work out and contrast how a share buyback affects EPS when it is funded 1) from surplus cash and 2) with borrowed money
  CFA Level II · Corporate Finance

  “A quick rule: EPS rises when the earnings yield (EPS ÷ price) exceeds the after-tax cost of funds, is unchanged when they are equal, and falls when it is lower.”

• Explain how equity styles are classified and where the labels fall short
  CFA Level III · Portfolio Management Pathway

  “Holdings-based analysis classifies each stock on characteristics such as price-to-book, earnings yield, dividend yield and expected growth, then aggregates to the portfolio.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with E · Glossary