Free Cash Flow Yield

Free Cash Flow Yield measures how much free cash flow a company generates relative to its share price or market value. It's like an earnings yield but uses actual cash instead of accounting profits.

Formula: FCF Yield = Free Cash Flow per Share / Stock Price

• Or: Total Free Cash Flow / Market Cap

Example:

Company	FCF per Share	Stock Price	FCF Yield
Company A	$5.00	$100	5.0%
Company B	$3.00	$50	6.0%
Company C	$2.00	$80	2.5%

Interpretation:

FCF Yield	Interpretation
> 8%	Potentially undervalued or high risk
5-8%	Attractive value range
3-5%	Fair value for quality companies
< 3%	Premium valuation or low cash generation

Why FCF Yield Matters:

1. Cash is king: Shows actual money available
2. Dividend potential: Cash available for dividends/buybacks
3. Acquisition metric: What yield would an acquirer get?
4. Comparison tool: Compare to bond yields

FCF Yield vs Earnings Yield:

FCF Yield	Earnings Yield (E/P)
Uses actual cash	Uses accounting earnings
Excludes depreciation	Includes non-cash charges
After CapEx	Before CapEx
Harder to manipulate	More manipulation risk

How Companies Use FCF:

• Dividends to shareholders
• Share buybacks
• Debt reduction
• Acquisitions
• Business reinvestment

Limitations:

• FCF can be volatile year-to-year
• High CapEx years distort the metric
• Doesn't account for growth potential
• Industry-dependent interpretation

Best Practice: Use trailing 3-year average FCF for more stable yield calculation.