Free cash flow yield

Free cash flow yield turns a valuation into something comparable to an interest rate. A 5% yield means the business currently generates cash equal to 5% of its price each year, which is directly comparable to what a bond would pay you.

It is the inverse of a price-to-free-cash-flow multiple and is easier to reason about, because higher is cheaper and the number sits on a scale people already have intuitions for.

Free cash flow of $170m and a market capitalisation of $3,000m.

1. 1170 / 3,000 = 0.0567.

Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.

• Compare it against the risk-free rate. A business yielding less than a government bond is being priced entirely on growth.
• A very high yield is usually a warning rather than a bargain. The market is normally pricing in a decline, and is sometimes right.
• Use several years of cash flow rather than one, since one good year can make an expensive company look cheap.

• It uses market capitalisation, so it ignores debt entirely. A highly leveraged company can look attractive on this measure alone.
• It inherits every weakness of free cash flow, including the stock-based compensation add-back.
• It says nothing about growth, and a low yield on a fast-growing business may be perfectly rational.

One of four metrics in the Valuation category of the scorecard, alongside forward P/E, EV/EBITDA and price to sales.

The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.