How free cash flow yield works

FCF yield is unlevered free cash flow divided by market capitalisation:

$$\text{FCF yield} = \frac{\text{Unlevered FCF}}{\text{Market cap}}$$

On $55,000,000 of unlevered FCF against $1,100,000,000 of market cap that is 5 percent. The $55,000,000 is the teaching-bridge cash from how free cash flow works: NOPAT plus D&A, minus capex, minus the increase in working capital. This page does not rebuild that bridge. It divides the cash the bridge already printed.

The FCF yield calculator on this page is that one division. How earnings yield works is profit over price. FCF yield against earnings yield is cash against accounting profit. They do not share a numerator.

Unlevered FCF is cash to the firm, before interest. A yield on market cap is then an equity-side reading of a firm-side cash flow. EV in the denominator would be the matching operations-side reading. This calculator uses market cap.

Keep FCF at $55,000,000. Cut market cap to $550,000,000. Yield is 10 percent.

The cash did not move. The denominator did. A higher FCF yield here is a cheaper cap on the same cash, or a cap that fell, not a fatter cheque. The first sheet's 5 percent was the same $55,000,000 of cash on $1,100,000,000 of market cap. Ranking those two sheets by yield ranks the cap, not a change in the cash the operations produced.

Distressed names print a huge FCF yield when the price collapses faster than trailing FCF. Sorting a list by FCF yield high to low is a ranking of that ratio, not a bargain screen on its own.

FCF $70,000,000, market cap $1,400,000,000. Yield is 5 percent, matching the first sheet.

The 5 percent hides scale. $70,000,000 of cash on $1,400,000,000 is a different object from $55,000,000 of cash on $1,100,000,000. Put the dollars back in before lining two names up. Do not paste this cap onto the P/E teaching sheet. Different firm, different residual.

How DCF works discounts a series of this FCF. A yield is a one-year snapshot of that cash over today's cap, not a DCF.

It is not earnings yield. Earnings are an accounting profit. Free cash flow has paid tax, capex and working capital. A firm can print a wide earnings yield and still consume cash.

It is not dividend yield. Dividends are cash the firm chose to send. FCF is cash the operations produced. Plenty of firms print a 5 percent FCF yield and pay none of it out.

It is not EV/EBITDA flipped. Different numerator, different denominator, different claim.

When market cap is zero the division stops. When FCF is zero the yield is zero, which is a description of the year, not a coupon. Negative FCF is a use of cash. This calculator will print a negative yield in that case rather than hiding it.

Trailing FCF over today's cap mixes last year's cash with this morning's price. A one-off working-capital release inflates the numerator. Type the FCF your sheet is using.

It is not the five-line FCF bridge, not an earnings-yield engine, and not a DCF. The three sheets are 5 percent on $55,000,000 of FCF over $1,100,000,000 of market cap, 10 percent when the cap is $550,000,000, and 5 percent on $70,000,000 over $1,400,000,000. This is educational material, not financial advice.