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Andre Maurois

Investment Dictionary


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Free Cash Flow Yield

 

Free cash flow yield (FCF yield) show how much of cash that may be distributed to shareholders the business earns compared to its price on the stock exchange (including both: equity value and debt value or just equity). The higher is the yield the more payouts shareholders can expect. 

 

Free cash flow yield might be the best ratio for dividend stocks with high cash flow but it will be useless for growth stocks while rapidly growing companies focus on growth but not on cash flow and payout to the shareholders. 

 

FCF yield calculation


(1) Free cash flow yield = Free cash flow + Net interest expenses / Enterprise value


Free cash flow = Operating cash flow - Capex


Enterprise value = Market capitalization + Net financial debt + Minority interest + Preferred equity


* Operating cash flow can be adjusted by working capital changes


(2) Free cash flow yield = Free cash flow / Market capitalization 

 

* Free cash flow can be adjusted by working capital changes

 

There is no real difference which ratio to use: FCF yield or EV/FCF ratio (P/FCF ratio) because they show the same thing only the calculation is reversal.

 






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