You can also combine other metrics such as dividend yield to further shortlist the stocks. One is to take all the S&P500 stocks, calculate their Free Cash Flow Yield and either pick the top 10-20 stocks or take stocks having a yield above certain percentage (suhas >10% yield). In order to identify and invest in high free cash flow yield, investors can use a screener based on free cash flow yield. If a company has negative free cash flow it might mean that the company is making larger investments. Negative free cash flow also is not bad.It is based on market value, not book value of the firm.This is because free cash flow is more difficult to manipulate than the net income. Free cash flow is a more reliable indicator of the firm’s profitability compared to its earnings.The company is generating more cash flow than it needs to spend, thereby less dependency on external funding.Strong balance sheet and cash flow generation capability.There are many reasons why investors prefer Free Cash Flow yield over other valuation metrics: However with a yield of 5 years, the investor payback period will reduce to just 20 years. For example, if the yield is 1%, the payback period will be 100 years. The higher the free cash flow yield, the lower will be the investor payback period. It is a good indicator to determine the investor’s payback period. The Enterprise Value is equal to the firm’s Market Capitalization + Debt – Cash.Ī higher free cash flow yield means that the company generates more cash with the same market valuation which is good for investors. Once we have the free cash flow, we can calculate the free cash flow yield by dividing free cash flow with the enterprise value.įree Cash Flow Yield = Free cash FLow / Enterprise Value Without free cash flow, the company will have to borrow to pay for these things.Ī positive free cash flow indicates that the company is generating more cash flow than what is required to run the business which allows it to pursue other growth opportunities. The company can use free cash flow for many purposes such as for developing new products, buy-back shares, issue dividends, or make acquisitions. This includes having paid for o laying out cash for expenses, taxes, interest as well as long-term investments. What is Free Cash Flow?įree cash flow ( FCF) refers to the cash generated by the firm’s operation that is available to shareholders after the company has paid for all its expenses.įree Cash Flow = Cash Flow from Operations – Net Capital Expenditure In this article we will look at why free Cash Flow Yield is a good measure and we will also build a Free Cash Flow Yield Screener on S&P500 stocks using MarketXLS. While all these valuations metrics are good, one that has been attracting many investors is the Free Cash Flow Yield. This includes valuation ratios such as Price to Earnings ratio, price to book value, price to sales, price to cash flow and many others. Investors use many valuation metrics while screening stocks for possible investments.
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