Free cash flow yield

Free cash flow yield is a free cash flow per share divided by current market price per share. It works similarly to earnings yield. The equation is:

\(FCFY = \frac{CFpS}{MPpS}\)

where:

  • FCFY - free cash flow yield,
  • CFpS - cash flow per share,
  • MPpS - market price per share.

The higher the free cash flow yield is the more attractive investment is, because investors want to pay less for higher profits.

The free cash flow yield is based on actual cash flow, not only on earnings which can, but don't have to be related to real cash. Therefore cash flow better explains how company operates and whether it is able to sustain problems.

References

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