Earnings per share divided by market price — the inverse of P/E expressed as a percentage, directly comparable to bond yields.
Deeper Explanation
When a stock trades at 10x earnings (P/E of 10), its earnings yield is 10% — meaning the company earns 10 rupees for every 100 rupees of market cap. Comparing the earnings yield to the risk-free government bond yield tells you whether equities are offering an appropriate risk premium. Graham used the earnings yield to determine whether stocks were generally cheap or expensive relative to bonds. When equity earnings yields fall below bond yields, equities are priced for perfection; when they exceed bond yields substantially, equities offer compelling value on a relative basis.
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