In this article you will know everything about free cash flow yield.
fcf yield is one of the best matric to know capacity of any company, that’s why it’s important to consider.
So, without further ado, let’s start to read this amazing Post.
What is free cash flow yield
Free cash flow yields a simple financial matrix which is calculated comparing free cash flow to a company’s market value.
It’s similar to other ratio like price to earnings which can show the performance of the company. But fcf yield is more accurate compare to P/E ratio cause it used cash rather than earning.
Confused? Let’s be clear. In the financial world three major statements exist.
- Income statement
- Balance sheet
- Cash flow statement
Earning and revenue data are shown in the income statement where cash regarding data shows in the cash flow statement. Wherever, the balance sheet connects both of the statements.
It’s not possible to match your earnings with your operating cash flow, because in the case of cash, some expenses are deducted. Also it’s possible to have company generated sales on credit, it means revenue generated in sheet but actually not come in account.
So, the cash flow metric shows the real performance of the company. That’s very helpful for investors to find out a company’s capacity to pay debt and pay a dividend.
A second definition of fcf yield is matric which compares free cash flow per share to company value per share.
Let’s understand this matrix deep down.
Free cash flow
Free cash flow is cash that is left after deducting all of expense and capital expenditures from the total cash. We can easily find out all of the data from the cash flow statement.
Cash flow statement is divided into three parts. In the first we get total cash generated from operations and from the third part we get total capital expenditures of the company.
So, calculate this data and get the value of the free cash flow. What is useful to find out free cash flow yield.
Remember, free cash flow itself indicates much information. If fcf becomes positive it means the company’s performance is good and able to pay its bill. Also that is capable of managing any financial problem. We can use that cash to grow company and invest in opportunities.
But very high positive sign also show that firm can’t optimize money for future growth.
Other side if fcf comes with negative sign, means company’s is very bad and can’t able to pay bill. Thus the company avoids dividends with shareholders. That’s why investors are unlike those companies.
Note that, growing companies have negative cash because they invest a lot of money for the future.
Now let’s know a little about market capital.
Market capital
Market capitalization shows the value of the company which is used as a divisor. It can be helpful for investors and the management team both to calculate some matrices which are compared with company value. Such as the debt ratio which is calculated by comparison to market capitalization.
When we compare free cash flow with market capitalization, get the fcf yield.
Formula of free cash flow yield is below.
Free cash flow yield = free cash flow/ market capitalization
This is not only formula is used, some of investors used enterprise value for divisor. It includes debt and minority interest which can make that matrix more accurate.
FCF yield = free cash flow/ enterprise value
By the way, still both are used for different purposes, where market capital is used for price to earning ratio where enterprises are able to compare different companies and industries.
Conclusion
So, that’s the information contained about free cash flow yield.
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