Free Cash Flow Yield Calculator (FCF Yield, EV Yield & Multiples)

A yield is just the reciprocal of a multiple, and stating valuation as a yield makes it directly comparable with bonds. A 20x earnings multiple is a 5% earnings yield, which can be set against a 4.5% government bond in a way "20 times earnings" cannot.

Free cash flow yield is the more honest of the two. Net income is an accounting construct shaped by depreciation policy, accruals and non-cash charges. Free cash flow is operating cash less capital expenditure: money the business actually generated and could return to owners.

The gap between them is diagnostic. Here free cash flow is 120% of net income, which is a good sign. When it runs persistently below, the accounting profit is not turning into cash, and that is one of the most reliable warning signs in equity analysis.

Enterprise value matters for the same reason. Equity yield ignores the balance sheet. A leveraged company looks cheaper on equity yield than it is, because the buyer inherits the debt.

The spread is the FCF yield less the risk-free rate: the excess return you are compensated with for taking equity risk rather than holding government bonds.

$50 share price, 100m shares, $300m FCF, $250m net income:

• Market cap: $5,000m
• Enterprise value: $5,000m + $800m − $300m = $5,500m
• FCF yield: $300m ÷ $5,000m = 6.00%
• FCF yield on EV: $300m ÷ $5,500m = 5.45%
• Earnings yield: 5.00%, the exact reciprocal of the 20.00x PE
• Cash conversion: $300m ÷ $250m = 120%
• Spread over the 4.5% risk-free rate: 1.50 points

If the share price doubles to $100: the yield halves to 3.00%. Yields and prices move inversely, exactly as with bonds, and at 3% the spread over the risk-free rate has turned negative.

With a net cash balance sheet (no debt, $1bn cash): enterprise value falls to $4,000m and the EV yield rises to 7.50%, above the equity yield. Net cash makes a company cheaper than its share price suggests.

With FCF of only $80m against $250m of net income: the yield collapses to 1.60% and cash conversion to 32%. The accounting profit is not becoming cash.

• Growth. A 6% yield on a shrinking business is worse than 4% on a compounding one. Yields are a snapshot, not a forecast.
• Sustainability of the cash flow. One year of free cash flow can be flattered by deferred capital expenditure or working capital release.
• Maintenance versus growth capex. Free cash flow deducts all capital expenditure, which understates cash generation for companies investing heavily in growth.
• Stock-based compensation, which is a real cost to shareholders and is often added back in company-reported free cash flow figures.
• Minority interests and preferred stock, which belong in a full enterprise value bridge.
• Operating leases, now capitalised under current standards but treated inconsistently in older comparisons.
• Pension deficits, which are debt-like and frequently omitted from enterprise value.
• Cyclicality. A cyclical peak year produces a flattering yield precisely when the shares are most expensive.
• Tax. These are pre-tax yields from the investor's perspective.

• Comparing equity yield across companies with different leverage. A heavily indebted company shows a higher equity yield for the same business. The EV yield is the comparable figure.
• Trusting company-reported free cash flow. Definitions vary, and adjusted figures frequently add back stock compensation or exclude particular capital spending. Compute it yourself from the cash flow statement.
• Ignoring cash conversion. Free cash flow persistently below net income is a warning. Above 100% is usually good, though it can also mean underinvestment.
• Treating a high yield as cheap. Very high yields usually reflect a market view that the cash flow will fall. The yield is high because the price is low, and the price is low for a reason.
• Forgetting growth. A 6% yield growing at 8% is worth far more than a 9% yield shrinking at 3%.
• Using a single year. Capital expenditure is lumpy. Average across a cycle where you can.

• Standard valuation mathematics. Free cash flow yield, earnings yield, enterprise value and the price to book and price to sales multiples carry no jurisdictional content.
• The identity that earnings yield is the reciprocal of the PE ratio is asserted directly in the engine vectors.