Earnings yield is equal to the annual earnings per share divided by the stock price. For example, if the price of a stock is $20 per share and that particular company earned $2 per share over the past 12 months, then the trailing twelve month earnings yield would be $2 / $20 or 10%.
Many investors use the earnings yield in the form of the PE ratio to determine if a stock or the stock market as a whole is expensive or not. For example, the average PE ratio for the S&P 500 index from 1950-2000 was 15.4. When the market peaked in early 2000 the PE ratio of the S&P 500 was a relatively high 30 suggesting that stocks were expensive.
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