Jargon, Decoded · Part 42 of 53
Earnings yield and FCF yield: the P/E turned upside down
What the two yields mean
The P/E post asked “how many years of earnings am I paying for?” Earnings yield asks the same question the other way round: what percentage of my purchase price does the company earn each year? It is simply EPS divided by price — the P/E inverted and expressed as a percentage.
The reason to bother is comparison. A P/E of 40 is hard to weigh against anything else. A 2.5% earnings yield sits naturally beside a 6.5% government bond, a 7% fixed deposit, or a 1.3% dividend yield — all of them “what does this pay me per rupee” numbers.
FCF yield does the same thing with free cash flow instead of accounting profit: cash the business actually generated after capex (capital expenditure), divided by market capitalisation. It is the stricter of the two, for the reasons the OCF/PAT post laid out — profit is an opinion, cash is a fact. Strictly, free cash flow before interest belongs to lenders as well as shareholders, so it pairs more consistently with enterprise value than with market cap; the market-cap version is the common shortcut, and for companies with little net debt, like both here, the two barely differ.
The formula
Earnings yield = EPS / Price = 1 / (P/E)
FCF yield = Free cash flow / Market cap
Worked example: Desi Bites Foods Ltd, at listing
From the case study: IPO price ₹640, FY25 post-issue EPS ₹16.72, FY25 free cash flow ₹246 lakh, market cap ₹8,000 lakh.
| Item | |
|---|---|
| P/E (post-issue) | 38.3x |
| Earnings yield = 16.72 / 640 | 2.61% |
| FCF yield = 246 / 8,000 | 3.08% |
| 10-year G-Sec (Government of India bond) yield (illustrative, from the WACC post) | 6.5% |
Worked example: Britannia Industries
Price ₹5,851 (NSE close, 30 June 2025; source: Yahoo Finance historical data), against FY25 financials from the audited results. For illustration only.
| Item | |
|---|---|
| P/E | 64.7x |
| Earnings yield = 90.45 / 5,851 | 1.55% |
| FCF (₹ crore) / market cap (₹ crore) | 2,105.8 / 1,40,950.59 |
| FCF yield | 1.49% |
| Dividend yield (from the dividend yield post) | 1.26% |
| 10-year G-Sec yield (illustrative) | 6.5% |
What the gap to the bond means — and doesn’t
A 1.55% earnings yield next to a 6.5% bond looks like a terrible deal, and that reading is half right. It is the market saying it expects Britannia’s earnings to grow substantially — enough that the yield on today’s price catches up with and overtakes the bond’s fixed coupon in the years ahead. A bond’s yield never grows. A company’s earnings can.
Which is exactly why the comparison is useful and exactly why it isn’t a verdict. It converts a valuation into a growth expectation you can look at directly: “this price only makes sense if earnings compound at roughly X% for Y years.” The reverse DCF did that for Desi Bites. Whether the expectation is reasonable is the analyst’s job; the yield just states it plainly.
Notice also that Britannia’s FCF yield (1.49%) sits close to its earnings yield (1.55%) — the two agree because its cash conversion is close to 1x. When FCF yield is far below earnings yield, profit isn’t turning into cash and the earnings yield is flattering. When it’s far above, capex is unusually low (or working capital was released), and the FCF yield may be the one that’s flattering — the capex intensity post showed Britannia’s FY25 FCF rose mainly because capex fell.
Desi Bites shows the other direction: its FCF yield (3.08%) is above its earnings yield (2.61%) because FY25 free cash flow (₹246 lakh) was larger than PAT (₹209 lakh) — operating cash flow came in at 1.56x profit, more than covering that year’s capex.
🧒 Explain it like I'm 10 (optional — skip if this is already clear)
Two piggy banks cost ₹100 each. The first one hands you ₹6.50 every year, forever, the same amount. The second one hands you ₹1.55 this year — but promises the amount will grow.
The second only makes sense if it really does grow, and keeps growing, for years. Earnings yield just tells you how big the first year’s coin is, so you can see how much growing it has to do.
Common mistakes
- Treating earnings yield below the bond yield as “overvalued”. It means growth is priced in. Whether enough growth arrives is the question, not the answer.
- Using pre-issue EPS after a fresh issue. Same trap as the EPS post — Desi Bites’ figure above uses the post-issue share count.
- Reading a high FCF yield as cheap without checking why. A capex holiday inflates one year’s FCF. Look at capex intensity over several years.
- Comparing yields across countries without adjusting for rates. A 4% earnings yield means something different where bonds pay 1% than where they pay 7%.
Takeaway: earnings yield is the P/E flipped into a percentage you can hold beside a bond, and FCF yield is the same idea on cash instead of profit. The gap to the bond isn’t a verdict; it’s the growth the price is assuming, stated in a unit you can actually think about.
This post is for educational purposes only and is not investment advice. Wealth Primer explains concepts, not recommendations — nothing here is a suggestion to buy, sell, or hold any specific security or fund. The author is not a SEBI-registered Research Analyst or Investment Adviser. Any prices or figures used as worked examples are historical and shown only to illustrate a calculation. Past performance does not indicate future results. Please do your own research or consult a registered adviser before making investment decisions. See the privacy & disclaimer policy for more.