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.

Article continues below

Try 6 free issues of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

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?

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.