How is earning yield calculated?

Earnings yield is a financial metric that signifies how much an investor earns from a company's earnings relative to its share price. It is commonly expressed as a percentage. To calculate earnings yield, the formula is earnings per share (EPS) divided by the current market price per share. This gives an indication of the earnings generated per dollar invested in the share.

Selecting the correct approach means recognizing that earnings yield illustrates the return aspect of an investment, thus helping investors assess whether a stock is undervalued or overvalued when compared to other investments.

This calculation serves investors well in comparing earnings yields across different companies or investment opportunities. In contrast, other methods listed do not accurately reflect the desired relationship between earnings and share price as they either handle dividends or reverse the necessary values leading to an incorrect assessment of the income potential relative to investment cost.