# Understanding Free Cash Flow Yield: Definition, Formula, and Calculation

## What Is Free Cash Flow Yield?

Free cash flow yield measures the financial performance of a company by comparing its free cash flow per share to its market price per share. This metric helps investors assess the attractiveness of the company as an investment, offering insight into how well a company can satisfy its obligations and benefit shareholders. The ratio is calculated by taking the free cash flow per share divided by the current share price.

Free cash flow yield is similar in nature to the earnings yield metric, which is usually meant to measure GAAP (generally accepted accounting principles) [earnings per share](https://www.investopedia.com/terms/e/eps.asp) divided by share price.

### Key Takeaways

*   Free cash flow yield is a solvency ratio that measures free cash flow per share against the market value per share.
*   A high free cash flow yield indicates a company can easily meet its debt obligations and provide returns to shareholders.
*   Investors prefer using free cash flow yield as it reflects the company's ability to generate cash compared to other valuation metrics based on accounting earnings.
*   Free cash flow is derived from operating cash flow after accounting for capital expenditures and reflects available cash for equity holders.

![Free Cash Flow Yield: A financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share.](https://www.investopedia.com/thmb/QCI4TrdgWKZXY6NDqe3bp_b9BX0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/freecashflowyield.asp-FINAL-ff037b79fb4b41a3b72c95f5ce051662.png)

*— Investopedia / Jiaqi Zhou*

## Formula for Free Cash Flow Yield

﻿ $Free\ Cash\ Flow\ Yield=\frac{Free\ Cash\ Flow\ per\ Share}{Market\ Price\ per\ Share}$﻿

## Understanding Free Cash Flow Yield Insights

Generally, the lower the ratio, the less attractive a company is as an investment, because it means investors are putting money into the company but not receiving a very good return in exchange. A high free cash flow yield result means a company is generating enough cash to easily satisfy its debt and other obligations, including dividend payouts.

Some investors regard free cash flow, which excludes [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp) but considers other ongoing costs a business incurs to keep itself running, as a more accurate representation of the returns shareholders receive from owning a business. They prefer to use free cash flow yield as a valuation metric over an earnings yield.

In addition to sustaining ongoing operations, cash flow from operations is also a funding source for a company's long-term capital investments. A company uses its operating cash flow for capital expenses first, before seeking outside funding. What's left over, known as free cash flow, is available to shareholders.

Investors who prefer cash flow yield see it as a more accurate measure of returns than traditional earnings or partial cash flows.

## Cash Flow vs. Earnings: Key Differences

Free cash flow comes from operating cash flow, which is the net cash received and paid during operations. [Cash flow](https://www.investopedia.com/terms/c/cashflow.asp) measures differ from earnings, which include all revenue and expenses, not just cash transactions.

Earnings summarize net income, while cash flow shows how well a company can continue operating. A company with strong cash flow finds it easier to sustain operations and earn more. Good cash flow often indicates better long-term value.

## Comparing Cash Flow Yield to Valuation Multiples

Investors might assess a company's value by comparing its cash flows to its equity value. [Cash flow](https://www.investopedia.com/terms/c/cashflowstatement.asp) reflects returns, while market price represents equity value. Investors may judge a company's worth based on the percentage of its cash flow over the equity's market price, which is referred to as cash flow yield.

Alternatively, investors may use a valuation multiple, dividing market price by cash flow, to assess worth. Cash flow yield, showing cash return as a percentage, can be simpler than using multiples.

## The Bottom Line

The free cash flow yield is a crucial metric for investors, offering insights into a company's ability to generate cash relative to its market value. A higher free cash flow yield indicates that a company can easily satisfy its debt and other obligations while providing a solid return to investors. Conversely, a lower yield suggests less attractive investment prospects.

By focusing on free cash flow, which excludes capital expenditures but includes other ongoing costs, investors gain an accurate understanding of the potential returns from owning a business. This metric can serve as a more intuitive valuation tool compared to traditional earnings or valuation multiples, as it directly reflects the percentage of cash returned on the investment.

> **Article Sources**
>
> 1.  Accounting Tools. "[Free Cash Flow Yield Definition](https://www.accountingtools.com/articles/free-cash-flow-yield)."