Free Cash Flow Yield

A 5% free cash flow yield means every $100 of market value is backed by $5 of annual free cash flow: FCF divided by market cap, the inverse of price-to-free-cash-flow. Some analysts run it against enterprise value instead, which is the stricter version for indebted companies — the equity-only version can make a levered business look deceptively cheap.

It is the staple of quality-value screens because it prices the cash, not the story. A durable business at a 7-8% FCF yield can fund a meaningful dividend plus buybacks with room to spare, while the S&P 500 in aggregate has typically yielded somewhere in the 3-5% range — so a large premium to that is the market saying it doubts the cash flow lasts.

That doubt is sometimes right, which is the trap: a 12% FCF yield on a business in structural decline is not a bargain, it is a countdown. The yield only means something paired with a view on whether the F in FCF is sustainable.