Free cash flow yield (FCFY) is a ratio used to work out the cash flow return on a share as a percentage. Mechanically, if free cash flow is, say, £100m, and the firm's market capitalisation (the number of shares in issue multiplied by the current price) is £500m then the FCFY is ((100m/500m) x 100%) or 20%. But what is free cash flow? This is not a number you can find directly from a set of accounts; it requires a bit of hunting around.
It's the annual operating cash flow generated by the firm after deducting non-discretionary cash flows, such as the tax bill, interest paid on loans and any capital expenditure needed to maintain the firm's operating assets. If you're an investor looking for a stable dividend flow in the future, then you want a firm that offers a consistent, high free cash flow. As for the FCFY, the higher the better from a value investor's perspective.
See Tim Bennett's video tutorial: Five ways companies can cook cash flow.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
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
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Paying the grandkids’ school fees could generate a shock IHT billPrivate school fees have soared as a result of the government’s VAT policy, meaning more grandparents are helping out – but what are the tax implications?
-
Number of savings deals hits record high – as interest rates slump to two-year lowSavers have more choice than ever when it comes to choosing a savings account or cash ISA. But, the interest rates on offer continue to fall. What’s next for the savings market?
