PE ratio vs earnings yield

Difference Between PE Ratio and Earnings Yield

The earnings yield is another valuation metric that is simply the inverse of the P/E ratio (the E/P ratio).

If you turn the formula around and divide the EPS number by the stock price and multiply by 100, then you get the earnings yield percentage.

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EPS Formula:

For example, a company with a stock price of $20 and an EPS of $1 has a PE ratio of 20 ($20 / $1) and an earnings yield of 5% (($1 / $20) * 100).

When To Use PE Ratio

If you want to compare the “yield“of different investments, then this may be a more useful number than the PE ratio.

For example, you may see that a savings account yields 2%, while a stock you like has an earnings yield of 5% with earnings that are growing each year.

Comparing the yields can give you a good idea of which one is a better long-term investment, although you should keep in mind that stocks are also much riskier than a savings account.