Valuation
Free cash flow yield
Free cash flow divided by market value — the cash return the business generates relative to its price.
How it works
It is harder to manipulate than the earnings yield, because free cash flow is closer to money actually generated than accounting profit is.
A high and sustainable figure means the business produces substantial cash relative to what you pay for it, whether or not it chooses to distribute it.
Where it misleads people
A single year can be flattered by underinvestment or by working-capital movements. Cutting maintenance spending raises this year’s free cash flow and damages the business.
Formula
FCF yield = free cash flow ÷ market capitalisation × 100Related terms
- Free cash flowCash left over after paying for the investment needed to maintain and grow the business.
- Earnings yieldEarnings per share divided by price — the P/E ratio inverted, expressed as a percentage.
- Capital expenditureMoney spent buying or upgrading long-lived assets like property, equipment and technology.
- Owner earningsReported profit adjusted to reflect the cash an owner could actually take out without harming the business.
More in Valuation
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.