Free cash flow yield

Free cash flow yield (FCFY) is a ratio used to work out the cash flow return on a share as a percentage. Mechanically, if free cash flow is, say, £100m, and the firm’s market capitalisation (the number of shares in issue multiplied by the current price) is £500m then the FCFY is ((100m/500m) x 100%) or 20%. But what is free cash flow? This is not a number you can find directly from a set of accounts; it requires a bit of hunting around.

It’s the annual operating cash flow generated by the firm after deducting non-discretionary cash flows, such as the tax bill, interest paid on loans and any capital expenditure needed to maintain the firm’s operating assets. If you’re an investor looking for a stable dividend flow in the future, then you want a firm that offers a consistent, high free cash flow. As for the FCFY, the higher the better from a value investor’s perspective.

• See Tim Bennett’s video tutorial: Five ways companies can cook cash flow.

Merryn

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