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Free Cash Flow Yield
Free Cash Flow Yield

a crucial metric offering investors a deeper insight into a company's ability to generate cash relative to its stock price.

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Written by Support
Updated over a year ago

On platforms like Dividend Data, you can find Free Cash Flow Yield for stocks. This helps you make informed investment decisions.

Definition:

Free Cash Flow Yield is a financial ratio that compares a company's free cash flow to its market capitalization or share price. It essentially measures how much cash a company generates for each dollar of its stock value, providing a clear picture of investment returns and company valuation.

Calculating Free Cash Flow Yield

The formula for Free Cash Flow Yield is:

Free Cash Flow Yield = Free Cash Flow / Market Capitalization

Or, on a per-share basis:

Free Cash Flow Yield = Free Cash Flow Per Share / Stock Price

Importance of Free Cash Flow Yield in Investment Analysis

  1. Valuation Tool: Helps in assessing whether a company's stock is undervalued or overvalued based on its ability to generate cash.

  2. Investment Comparison: Useful for comparing the potential returns of different companies, regardless of size or industry.

  3. Financial Health Indicator: A high Free Cash Flow Yield can indicate strong financial health and the potential for future growth or dividends.

Free Cash Flow Yield vs. Dividend Yield

  • While Dividend Yield measures the return in terms of dividends paid, Free Cash Flow Yield provides a broader view of the company's overall cash-generating efficiency.

Analyzing Free Cash Flow Yield

  1. High vs. Low Yield: A higher yield may indicate a potentially undervalued stock with strong cash flows, while a lower yield could suggest overvaluation or weaker cash generation.

  2. Industry Benchmarks: Comparing Free Cash Flow Yield across similar companies can reveal relative investment attractiveness.

  3. Historical Trends: Tracking the yield over time can give insights into the company's changing financial performance and market valuation.

Factors Influencing Free Cash Flow Yield

  1. Operational Efficiency: A company's operational success directly impacts its free cash flow generation.

  2. Market Capitalization Fluctuations: Changes in stock price can significantly affect the Free Cash Flow Yield.

  3. Capital Expenditures: High capital expenditures can reduce free cash flow, affecting the yield.

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