Free Cash Flow Yield (FCF yield): Definition and How to Use It
FCF yield measures free cash flow generated relative to market capitalization and is often used to screen for undervalued companies.
Formula
Use trailing twelve months (TTM) or normalized FCF. For comparability, use the same FCF definition across peers.
Why it matters
- FCF yield is a direct measure of cash return relative to value — higher yields can indicate better cash generation or undervaluation.
- Complement FCF yield with growth and quality metrics — a one-off high FCF may not persist.
- Use in valuation frameworks like DCF as a sanity check against implied yields from prices.
Implementation notes
- Define Free Cash Flow consistently (operating cash flow - capex, or adjusted FCF) across comparisons.
- Remove one-time cash items and normalize for seasonal businesses.
- Use alongside other valuation metrics (P/E, EV/EBITDA) to avoid overreliance on a single number.