Definition:

Free Cash Flow Yield is a financial metric that measures the amount of free cash flow a company generates relative to its market capitalization. It is used to assess how efficiently a company is generating cash flow relative to its size.

Formula:

Free Cash Flow Yield = Free Cash Flow / Market Capitalization

How to use the metric:

Investors use Free Cash Flow Yield to evaluate the attractiveness of an investment. A higher yield indicates that a company is generating a significant amount of cash flow relative to its market value, which can be a sign of financial health and potential for growth or dividends.

Limitations:

Free Cash Flow Yield does not account for differences in capital structure, industry-specific factors, or future growth prospects. It can also be misleading for companies with volatile cash flows or those in cyclical industries.

Applies to:

This metric works best in industries with stable and predictable cash flows, such as utilities, consumer staples, and mature technology companies.

Doesn't apply to:

It may not be as useful in industries with high capital expenditures or volatile cash flows, such as startups, biotech, or companies in the early stages of growth, where cash flow can be inconsistent.

Summary:

Free Cash Flow Yield is a useful metric for assessing a company's ability to generate cash relative to its market value. While it provides insights into financial health, it should be used in conjunction with other metrics and industry considerations to make informed investment decisions.