Earnings yield
ValuationThe latest fiscal year's net income as a percentage of market cap — the P/E turned upside down.
Formula
Earnings yield = net income ÷ market cap
Why it matters
Expressing valuation as a yield instead of a multiple lets you compare a stock directly against bonds and cash: a 6% earnings yield versus a 4% Treasury yield tells you what extra compensation you are getting for equity risk — before any growth. Growth is the equity holder's edge: the bond coupon is fixed, while a good business's earnings rise over time. Yields also add and compare more intuitively than multiples.
What good looks like
An earnings yield meaningfully above the 10-year Treasury yield (say 6%+ when Treasuries pay 4%) prices in modest expectations; a yield below the Treasury rate means you are relying on growth to catch up. Under 3% (P/E above ~33) leaves little room for disappointment.
Caveats
All the caveats of the P/E apply in mirror image: accounting noise in net income, the lag from using the latest fiscal year, and peak-cycle traps at cyclicals. The comparison with bond yields is inexact — earnings are variable and reinvested, coupons are contractual — so treat the spread as orientation, not arithmetic.