FCF yield

The free cash flow (FCF) yield is a way to decide whether a firm is cheap or expensive based on its cash flows rather than, say, its earnings. For example, if a firm’s share price is £2.50 and it generates free cash flow per share of 50p, the yield is 20% (0.5/2.5 x 100%). The higher the yield the better value the share.

Free cash flow is the annual cash available to the directors after certain non-discretionary items have been deducted. Typically this is the firm’s operating cash flow – generated by its core business – less interest and tax payments and the amount the firm needs to spend to maintain existing fixed assets.

Like all ratios, this one is not perfect. Cash flows may be harder to manipulate than earnings but they can also fluctuate sharply from year to year. And alone, any ratio is dangerous.

• See Tim Bennett’s video tutorial: What is a cash-flow statement?


Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.