Free cash flow yield

A ratio compares the price the market puts on a stock to a measure of the business, such as its earnings, its assets, or its cash flow. It tells you how expensive a stock is relative to that measure, not just whether the share price is high or low in absolute terms.

Free cash flow yield divides free cash flow by market cap, showing what percentage of the company's market value is generated as actual free cash each year. Unlike most ratios, it is expressed as a percentage rather than a multiple, which makes it directly comparable to other yields, such as a bond's interest rate or a dividend yield.

The formula is:

A higher free cash flow yield generally signals a cheaper stock relative to the real cash it produces. Some investors calculate this against enterprise value instead of market cap, to account for debt and cash on the balance sheet, the same adjustment used in EV to EBITDA.