FCF Yield: Definition, Formula & Meaning
Free cash flow yield (FCF yield) is a financial ratio that compares a company's free cash flow to its market capitalization. It tells investors how much cash a business generates relative to the price the market assigns to it, making it one of the most practical valuation metrics available.
What is FCF Yield? (FCF Yield Definition)
FCF yield — also written as FCFY or free cash flow yield — measures the percentage of free cash flow a company produces per dollar of market value. Unlike earnings-based metrics, FCF yield focuses on actual cash generation, which is why many fundamental investors prefer it as a gauge of value and financial health.
FCF Yield Formula
FCF Yield = (Free Cash Flow ÷ Market Capitalization) × 100%
Per-share variant: FCF Yield = (FCF per Share ÷ Stock Price) × 100%
Free cash flow is calculated as operating cash flow (OCF) minus capital expenditures (CapEx).
How to Calculate FCF Yield — Step by Step
- Find Operating Cash Flow (OCF) — locate this on the company's cash flow statement.
- Subtract Capital Expenditures (CapEx) — this gives you free cash flow: FCF = OCF − CapEx.
- Divide by Market Capitalization — then multiply by 100 to express the result as a percentage.
What is a Good FCF Yield?
An FCF yield above 5% is generally considered attractive. Yields above 8–10% may indicate undervaluation, but context matters: sector norms, the company's growth stage, prevailing interest rates, and capital-allocation priorities all influence whether a given yield signals genuine value or a potential value trap.
FCF Yield vs P/E Ratio — Key Differences
The P/E ratio relies on net income, which includes non-cash items such as depreciation, amortization, and stock-based compensation. FCF yield uses actual cash generated by the business. Because cash flow is harder to manipulate than accounting earnings, FCF yield often provides a more reliable picture of a company's valuation and financial strength.
Levered vs Unlevered FCF Yield
Levered FCF yield (also called equity FCF yield) divides free cash flow to equity by the company's equity market capitalization. Unlevered FCF yield divides free cash flow to the firm (FCFF) by enterprise value, removing the effect of debt. Unlevered yield is useful for comparing companies with different capital structures, while levered yield reflects the cash available to equity holders after debt service.
Frequently Asked Questions
What is FCF yield?
FCF yield (free cash flow yield) is a valuation ratio that expresses a company's free cash flow as a percentage of its market capitalization. It shows how much cash a business generates for every dollar of market value.
What is a good FCF yield?
An FCF yield above 5% is generally attractive. Yields of 8–10% or higher may signal undervaluation, though investors should consider sector averages, growth prospects, and macroeconomic conditions before drawing conclusions.
How do you calculate FCF yield?
Subtract capital expenditures from operating cash flow to get free cash flow, then divide by market capitalization and multiply by 100%. The per-share version divides FCF per share by the stock price.
What is the difference between levered and unlevered FCF yield?
Levered FCF yield uses free cash flow to equity divided by equity market cap. Unlevered FCF yield uses free cash flow to the firm divided by enterprise value, which strips out the impact of debt financing.
How does FCF yield differ from earnings yield?
Earnings yield (inverse of P/E) is based on net income, which includes non-cash charges. FCF yield is based on actual cash generated, making it less susceptible to accounting adjustments and generally a more conservative measure of value.