The formula
How to calculate free cash flow yield
Free cash flow yield is the cash a business throws off as a percentage of what the market charges for it. Think of it as the return you would receive if every spare pound were handed to shareholders.
It sits alongside the earnings yield but uses cash rather than accounting profit, which makes it the more conservative of the two. A large gap between the earnings yield and this one is worth investigating.
What to enter:
- Free cash flow
- Market capitalisation
The result updates on every keystroke. The URL updates too, which makes the filled-in version easy to bookmark or send to someone else.
Worked example
A concrete run-through, using the values already in the fields:
- Free cash flow: 58,000,000
- Market capitalisation: 950,000,000
That gives:
- Free cash flow yield: 6.11 %
- Price to free cash flow: 16.38 ×
- Years of free cash flow to buy the company: 16.38 years
Reading the result
Compare it against a risk-free rate. When government bonds yield 4% and a company yields 6% on free cash flow, the market is offering two points for taking equity risk — thin. At 10% either the market has doubts, or the price is genuinely low.
Where this goes wrong. Using market capitalisation while the company carries heavy debt. Enterprise value — market cap plus net debt — is the fairer denominator, because a buyer inherits the borrowings along with the cash flows.
Above 5% is generally considered attractive for an established business in a normal rate environment, and above 8% is cheap enough to demand an explanation. Both thresholds shift up when interest rates do.
It does not always, but it is harder to manipulate. Earnings depend on accruals and estimates; cash flow depends on bank statements. Where the two disagree persistently, the cash figure is usually the one telling the truth.
It returns free cash flow yield. With 58,000,000 free cash flow and 950,000,000 market capitalisation, that comes to 6.11 %. Change any field and the figure moves with it.