Earnings Yield is a key financial metric that indicates how much a company earns per share relative to its current market price. It is essentially the inverse of the Price-to-Earnings (P/E) ratio and helps investors evaluate whether a stock is undervalued or overvalued. The formula for calculating earnings yield is:

Earnings Yield = (Earnings Per Share ˜ Market Price Per Share) ? 100

Example:
If a company has an Earnings Per Share (EPS) of ?20 and its market price is ?400, the earnings yield is (20 ˜ 400) ? 100 = 5%. This means the company generates a 5% return on the market price of its shares.

Importance of Earnings Yield:
Earnings yield helps investors compare the profitability of stocks with other investment options such as bonds or fixed deposits. For example, if government bonds offer a yield of 6% and a companyís earnings yield is 8%, the stock may be relatively more attractiveóprovided other fundamentals are strong.

Factors Influencing Earnings Yield:

• Corporate Profits: Higher profits lead to better earnings yield.
• Stock Price Movements: A rise in stock price lowers earnings yield and vice versa.
• Market Conditions: During market booms, yields generally compress as prices rise faster than earnings.
• Economic Factors: Inflation, interest rates, and business cycles impact overall market yields.

Use in Valuation:
Analysts often use earnings yield to assess whether a stock or index is fairly valued. A higher yield may indicate undervaluation, while a very low yield could suggest overvaluation. When compared to bond yields, it helps investors decide between equity and fixed-income investments based on risk and return expectations.

In summary, earnings yield provides a clear, percentage-based measure of a companyís profitability relative to its stock price, enabling investors to make informed, risk-adjusted investment decisions.