Earnings Yield in 2025: Your Shortcut to Smarter Investing

Is there a fast, reliable way to spot whether a stock is undervalued or overpriced in 2025’s bustling Australian market? Enter earnings yield—a classic, often underrated metric that’s getting fresh attention as investors hunt for quality in a world of higher interest rates and shifting economic policy.

What Is Earnings Yield and Why Should You Care?

Earnings yield is the inverse of the price-to-earnings (P/E) ratio. While P/E tells you how much you’re paying for each dollar of earnings, earnings yield tells you how much a company earns for every dollar you invest. Put simply, it’s calculated as:

• Earnings Yield = Earnings Per Share (EPS) / Share Price

Expressed as a percentage, it’s an intuitive way to compare potential returns from shares to other asset classes, like government bonds or term deposits. In a year where the RBA’s cash rate remains elevated and fixed income returns are no longer negligible, this comparison is more relevant than ever.

Earnings Yield in Action: 2025 Trends and Examples

Let’s see how this metric is informing real-world decisions in 2025. With ASX-listed companies reporting stronger post-pandemic earnings but also facing higher borrowing costs, earnings yields are diverging sharply between sectors.

• Resource Giants: BHP and Rio Tinto have seen their earnings yields climb above 8% thanks to robust commodity prices, while their share prices remain volatile amid global uncertainty.

• Banks: The big four banks are offering earnings yields around 6%, still attractive compared to term deposits but lower than in previous years due to margin pressures from rising funding costs.

• Tech Shares: Many ASX tech darlings have earnings yields below 3% or even negative, reflecting high valuations and limited profitability. Here, investors must weigh growth expectations against the security of current earnings.

For context, the 10-year Australian government bond yield sits around 4.1% in early 2025. This means a stock with an earnings yield above that level may offer better compensation for risk—if its earnings are stable.

Earnings Yield vs P/E: Why the Difference Matters

While the P/E ratio is a household name, earnings yield flips the script and makes comparison easier across asset types. Here’s why many Australian analysts prefer it in 2025:

• Direct Comparison: You can stack a company’s earnings yield up against the yield on a term deposit, bond, or even rental yield on property.

• Clearer Value Signal: In an environment where interest rates are elevated, a high earnings yield may indicate a stock is undervalued relative to safer assets.

• Global Relevance: International investors, including major funds, increasingly use earnings yield to screen for value across markets, not just within Australia.

But remember, a high earnings yield isn’t always a green light. Sometimes it signals that the market expects earnings to fall, or that the company is facing structural challenges (think old-school retailers or disrupted industries).

How to Use Earnings Yield in Your Portfolio

If you’re building or rebalancing your investments in 2025, earnings yield can be a powerful tool—but it works best as part of a broader toolkit. Here are practical ways to use it:

• Screen for Value: Start by looking for ASX stocks with earnings yields higher than the benchmark bond rate or your minimum required return.

• Sector Comparison: Compare earnings yields within a sector to identify outliers that might be undervalued (or overhyped).

• Check for Red Flags: Investigate why a company’s earnings yield is high. Is it sustainable, or a sign of trouble?

• Portfolio Diversification: Use earnings yield alongside dividend yield, growth prospects, and debt levels to build a balanced mix of growth and income assets.

With 2025’s economic landscape still unpredictable, having a simple, direct metric to cut through the noise is more valuable than ever.

The Bottom Line

Earnings yield isn’t just an old-school metric—it’s a modern shortcut for investors seeking value and clarity in a complex market. By comparing what you earn per dollar invested across stocks, bonds, and beyond, you can make smarter, more confident decisions. In 2025, with rates high and volatility back, it pays to know your yield.