Earnings yield

Earnings yield is trailing earnings per share divided by the share price, expressed as a percentage — the price-to-earnings ratio turned upside down so that a stock can be read like a bond. A share earning five dollars and priced at a hundred yields five percent; the identical fact stated as a multiple is a P/E of twenty.

The inversion exists for comparison. An investor holding cash can buy a government bond and know the yield to the basis point; the earnings yield states what the same dollars would earn, per year, as a claim on a company's current profits. Benjamin Graham made the comparison a discipline: he wanted an earnings yield comfortably above the yield of high-grade bonds before a stock deserved attention, the excess being payment for uncertainty. The comparison is a framing device, not a timing signal — markets have spent long stretches looking expensive against bonds while continuing to compound — but as a habit of mind it keeps price attached to something outside the stock market.

The yield has a technical advantage over its more famous reciprocal: it behaves at zero. A loss-making company has no meaningful P/E — the multiple explodes toward infinity as earnings shrink and flips sign below zero — whereas its earnings yield is simply negative, an honest statement of real economics. For the same reason yields rank and average sensibly across a list of companies where multiples cannot, which is why screens and cross-market comparisons are better run on yield than on P/E.

Reading the level is a two-step judgement. The first step is the spread over a safe bond: a stock offering little more than the Treasury yield is priced for its earnings to grow, and the buyer should be able to say why they will. The second step is remembering the asymmetry — coupons are fixed by contract while earnings can rise for decades, which is the whole argument for equities, and can also vanish, which is the whole argument for caution. A generous yield built on fragile earnings is generosity of a very temporary kind.

The classic failure mode is cyclical. Earnings peak precisely when times are best, so the yield looks fattest at the top of the cycle — homebuilders, commodity producers and lenders have repeatedly offered double-digit earnings yields in the year before their profits collapsed. The optically cheapest moment and the most dangerous moment coincide. Graham's remedy — judging earnings power on an average of seven to ten years rather than one — is old, unfashionable and still sensible.

One respected variant deserves a note. Joel Greenblatt's version divides operating profit by enterprise value rather than earnings by price, making it indifferent to how the company is financed; a business cannot flatter that ratio by loading its balance sheet with debt. The plain earnings yield, by contrast, mixes the quality of the business with the boldness of its financing — worth remembering when a leveraged company appears remarkably cheap.

Moatkeep computes earnings yield as trailing-twelve-month diluted earnings per share divided by the split-adjusted share price, times one hundred. The per-share figure is built as trailing net income divided by diluted shares — never by summing four reported quarterly EPS numbers, whose share counts differ — from each company's own SEC filings, point-in-time and revised on restatement, with the fiscal period stamped on every figure. Loss-makers display a genuinely negative yield rather than a blank.

What the yield restates is compensation: how much current earning power a dollar of price buys. What it cannot state is durability. A five percent yield from a fortress and a five percent yield from a fad are the same number and profoundly different investments — the number opens the inquiry a value investor has to finish by reading the business.