Course 303: Price/Earnings Ratio
P/E's Flip Side, Earnings Yield
In this course
1 Introduction
2 How to Use P/E
3 P/E's Flip Side, Earnings Yield

One useful variant of P/E is earnings yield, or earnings per share divided by stock price, usually expressed as a percentage. Earnings yield is just the inverse of P/E (which is equal to stock price divided by earnings per share), so it moves in the opposite direction of P/E. A high earnings yield indicates a cheap stock while a low earnings yield indicates an expensive one. Many value-oriented mutual fund managers use earnings yield to identify bargain stocks. Expressing the relationship as a percentage, as earnings yield does, is in some ways more illuminating than the traditional P/E. Earnings yield can be used for clear comparisons between companies and even between different asset classes. In fact, many mutual fund managers compare earnings yields with 10- or 30-year Treasury-bond yields to get an idea of how expensive stocks are. Indeed, some academic research indicates that over time earnings yield has been one of the better indicators for judging if the market is over- or undervalued. Although the S&P 500's earnings yield hasn't topped the yield of the 30-year Treasury in years, stocks have still outperformed bonds because investors have been willing to pay ever-higher prices for earnings. The S&P 500's meager 3% earnings yield in 1999 (the inverse of its P/E of 33) reflects how optimistic the market is about its future earnings power. By contrast, a stock with a high earnings yield signals that the market currently expects little from it.

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