Free Cash Flow Yield
Free cash flow divided by market capitalization. The cash-yield equivalent of earnings yield — answering "what cash return does the equity throw off relative to its price?"
When to use: Use for cash-generative businesses where reported earnings differ materially from real cash earnings. FCF yield is harder to manipulate than earnings yield, making it favored for value screens and capital-allocation analysis.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| FCFYield | FCF Yield | FCF ÷ market cap, as a decimal | % |
| FCF | Free Cash Flow | Operating cash flow minus capital expenditures | $ |
| MarketCap | Market Cap | Equity market capitalization | $ |
Real-Life Examples
Example 1: Mid-Cap Cash Compounder
Market cap $5B, free cash flow $400M.
Given
Step-by-Step
8% FCF yield — a comfortable cash return, especially against a 4-5% Treasury. The company throws off enough cash to fund dividends, buybacks, and growth investment without external financing — a classic compounder profile.
Frequently Asked Questions
FCF subtracts capex and reflects actual cash that could be distributed; earnings includes non-cash items (depreciation) and may include cash that gets reinvested in working capital. For mature businesses they converge; for growth or capex-heavy businesses they can diverge sharply.
Levered FCF (FCF to equity, after interest payments) for FCF yield against market cap. Unlevered FCF (FCF to firm, before interest) goes against enterprise value. Mixing the two double-counts or under-counts debt service.
Yes — FCF yield is the upper bound on sustainable dividend yield (you cannot pay out more than you generate, long-term). Companies with FCF yields well above their dividend yields have buyback room or are conservatively retaining cash.