Equity free cash-flow yield

Cash flow is vital because if a business runs out of cash it may go bust even if it is making a decent profit.

Equity free cash-flow is the cash generated each year for shareholders after certain 'non-discretionary' expenses have been paid, such as interest on debt, tax and the capital expenditure needed to replace long-term assets as they wear out.

What's left is often called "free cash flow", which is then available to be used, perhaps to pay a dividend or expand the business.To turn this into an equity free cash-flow yield you divide it by the firms market capitalisation. The higher the yield the better.

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However, as with all ratios this can be meaningless in isolation and should be compared with the previous year and other companies in the same sector.

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