What is Free Cash Flow Yield?
Free cash flow yield measures how much free cash flow a company generates relative to its market value. It shows the percentage return in cash terms that equity investors receive for each dollar invested in the company. Investors use it to gauge solvency, dividend sustainability, and overall capital efficiency.
Formula
Two common, equivalent ways to express the metric:
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Per-share basis
Free Cash Flow Yield = Free Cash Flow per Share / Market Price per Share
Where:
* Free Cash Flow per Share = (Operating Cash Flow − Capital Expenditures) / Shares Outstanding
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Market-cap basis
Free Cash Flow Yield = Free Cash Flow / Market Capitalization
How to calculate
- Obtain operating cash flow from the cash flow statement.
- Subtract capital expenditures (CapEx) to get free cash flow.
- Use either:
- Divide free cash flow by shares outstanding to get per-share free cash flow, then divide by current share price; or
- Divide total free cash flow by the company’s market capitalization.
What it tells you
- A higher free cash flow yield indicates the company generates relatively strong cash returns versus its valuation, suggesting greater ability to:
- Service debt
- Pay dividends or buy back shares
- Invest in growth without external financing
- A lower yield suggests the market is paying more for each dollar of free cash flow, which can signal overvaluation or lower current cash-generation ability.
Many investors prefer free cash flow yield over earnings-based metrics because free cash flow reflects actual cash available to shareholders after necessary capital investments.
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Cash flow vs. earnings
- Earnings (net income) are accrual-based and include noncash items (depreciation, amortization) and accounting adjustments.
- Cash flow focuses on actual cash inflows and outflows from operations.
- Free cash flow—operating cash flow minus CapEx—shows what cash remains for shareholders and creditors, making it a useful indicator of long-term financial health.
Free cash flow yield vs. valuation multiples
- Free cash flow yield expresses cash returns as a percentage of market value, making it intuitive for comparing companies.
- Valuation multiples (e.g., market price / cash flow) are the inverse: they show how many dollars of market value investors pay for each dollar of cash flow.
- Yield (percentage) is often simpler to interpret for return comparisons; multiples are commonly used for comparables and benchmarking.
Key takeaways
- Free cash flow yield compares free cash flow to market value to show cash return on investment.
- It’s useful for assessing solvency, dividend sustainability, and the ability to fund growth internally.
- Free cash flow yield can be more informative than earnings-based measures because it focuses on actual cash available to shareholders.
- Use the per-share or market-cap formula depending on available data and comparison needs.