Definition§
Free Cash Flow Yield (FCF Yield) is a financial solvency ratio that measures the expected free cash flow per share of a company against its market value per share. It is calculated using the formula:
$$ \text{Free Cash Flow Yield} = \frac{\text{Free Cash Flow per Share}}{\text{Market Price per Share}} $$
In simple terms: it tells you how well a company is generating cash relative to what you’re paying for a piece of it.
| Free Cash Flow Yield | Earnings Yield |
|---|---|
| Focuses on cash flow: cash in hand that is available for payment to investors or reinvestment. | Focuses on profit: potentially includes accounting tricks and is less indicative of cash position. |
| Formula: FCF / Share Price | Formula: Earnings / Share Price |
| Reflects true liquidity | Reflects accounting profit |
| Often more stable: cash tends to have less volatility than earnings. | Can be influenced by accounting practices: What goes up must also go down, like a yo-yo! |
Example Calculation§
If a company has a free cash flow of $1,000,000 and there are 1,000,000 shares outstanding, then:
$$ \text{Free Cash Flow per Share} = \frac{1,000,000}{1,000,000} = 1 $$
If the current share price is $20:
$$ \text{FCF Yield} = \frac{1}{20} = 0.05 \text{ or } 5% $$
This means for every dollar you invest, you potentially receive 5 cents in free cash flow. Not too shabby unless you’re investing in a chocolate fountain—as those typically don’t yield cash!
Related Terms§
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Earnings Yield: The earnings per share of a company divided by its market price per share; it’s like the cousin who focuses on earnings rather than cash.
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Free Cash Flow: The cash generated by a company after accounting for capital expenditures. It’s the cash left over for Rah-Rah’s and table dances after all the bills are paid!
Humorous Insight§
“Walt Disney once said, ‘The way to get started is to quit talking and begin doing.’ Imagine if you told your investors that your free cash flow yield was just a myth—talk about a scary Halloween special!” 🎃
Frequently Asked Questions§
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Why is Free Cash Flow Yield important?
- It provides insights into a company’s ability to generate cash after accounting for capital expenditures, indicating financial health and value.
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How is Free Cash Flow Yield different from Dividend Yield?
- Free Cash Flow Yield measures cash generated, whereas Dividend Yield measures actual cash returned to shareholders.
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Can a company have a high free cash flow yield but still face financial problems?
- Yes, because a high yield does not guarantee good management or lack of hidden liabilities!
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Is a high FCF Yield always good?
- Not necessarily! Sometimes it indicates a lack of growth opportunities that could be attractive to other investors.
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How can I use Free Cash Flow Yield in my investment decisions?
- Compare the FCF Yield of companies in the same industry to find where you can get more bang for your buck!
References and Resources§
- Investopedia: What is Free Cash Flow Yield?
- Financial Modeling Guide by Simon Benninga
- “The Intelligent Investor” by Benjamin Graham
Test Your Knowledge: Free Cash Flow Yield Quiz§
Thank you for diving into the world of Free Cash Flow Yield! May your investments flow like cash and return faster than a speeding bullet! 💸
