Free Cash Flow Yield
AdvancedFree cash flow yield is a company's free cash flow per share divided by its share price, or total free cash flow divided by market value, showing how much free cash the company generates relative to its value.
Free cash flow yield is similar to an earnings yield, but uses free cash flow, the cash left after operating costs and investment, instead of accounting profit. Many investors see it as a more reliable measure, because cash is harder to manipulate than earnings.
For example, if a company generates free cash flow of 3 per share and its share price is 50, its free cash flow yield is 6%.
A higher yield can suggest a share is cheaper relative to the cash the business produces, and that the company has more capacity to pay dividends, buy back shares or reduce debt. A low yield may indicate an expensive share, or a company investing heavily for growth.
Free cash flow can be volatile from year to year, especially for companies with lumpy investment spending, so analysts often look at several years. Some use enterprise value instead of market value, which takes account of debt and gives a figure that is easier to compare across companies with different levels of borrowing.
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