Earnings yield

Earnings per share divided by price, the inverse of the price to earnings multiple. A stock on 20 times has a 5% earnings yield.

Turning the multiple upside down changes how it reads. A yield can be compared directly with a bond yield, with the cost of debt, or with the return on an alternative investment, and the comparison exposes what the multiple implies about required return.

The version used in quality screens pairs earnings yield with return on capital, on the reasoning that a good business bought at a decent yield is the whole of value investing compressed into two ratios.

Yields compare across asset classes. Multiples do not.

The pairing that made it famous combines earnings yield with return on capital, on the reasoning that a good business bought at a decent yield is the whole of value investing compressed into two ratios. Ranking a universe on both and taking the intersection is a screen that has survived a great deal of out-of-sample testing.