Earnings yield is a stock market analysis tool used to compare the relative value of stocks and the value of the overall market to alternative investments like Treasury bonds. Earnings yield is expressed as a percentage to show the profitability of a company in relation to the stock price. Using earnings yield has several advantages over the similar price-to-earnings ratio calculation.
Look up the current share price and the net income per share for the last year — four reporting quarters — for the stock. Earnings per share can be found on financial websites under financial data or under Analyst Estimates on Yahoo! Finance. The information can also be found on the investors' page of the company's website.
Add together the earnings per share for the last four quarters to get the earnings per share for the last year. For example, the quarterly earnings for Frontline Ltd. were negative $0.10, $0.05, $0.90 and $0.92. The total is $1.97.
Divide the earnings per share by the current share price and multiply times 100 to convert to a percentage. If the earnings are a negative number, the earnings yield will be negative. In the example, Frontline was at $26.57 per share. The calculation gives Frontline an earnings yield of 7.4 percent.
Earnings yield is the inverse of the price-to-earnings (P/E) ratio. If a company has a P/E of 25, it has an earnings yield of 4 percent. An advantage of earnings yield is that it can be calculated for negative earnings. P/E is not reported for companies with losses.
Earnings yield is often calculated on the S&P 500 stock index to get a relative value of the market. The International Business Times reported that at the end of June 2010, the S&P 500 had an earnings yield of just over 7 percent, a 20-year high. A high yield can be an indication of undervalued stocks.