FCF yield divides annual free cash flow by market capitalisation. It reframes free cash flow as a return figure, comparable to a bond yield — the cash return you'd theoretically receive if every dollar of free cash flow were distributed to shareholders today.
The formula
Free Cash FlowMarket Cap
= FCF Yield
Why it matters
- —Directly comparable to a bond yield or the risk-free rate — a useful sanity check on whether you're being paid enough to take on equity risk.
- —Harder to manipulate with accounting choices than an earnings yield, since it's built on cash, not reported profit.
- —A very high FCF yield isn't automatically a bargain — check why the market is pricing the stock that cheaply before assuming it's a mispricing.
How to read it
| < 3% | Priced for growth, or genuinely expensive on a cash basis |
| 3%–6% | Reasonable, broadly in line with long-term bond yields |
| > 8% | Cheap on cash terms — or the market is pricing in a problem |