FCF Yield Calculator: Is This Stock Cheap?
Free cash flow yield is the quickest honest test of whether a stock is cheap. It tells you how much cash the business produces for every dollar you pay for it.
This free calculator works out the FCF yield, price to free cash flow, and the share price that would give you a 5% yield. That 5% line is the first test in Criterion 5 of the Gingernomics framework.
How to Use the Calculator
Take the first four numbers from the cash flow statement and the annual report, and the share price from any quote site.
Operating cash flow. Cash generated by the business, from the cash flow statement.
Capital expenditure. Spending on property, plant and equipment.
Stock-based compensation. Found in the operating cash flow section. We subtract it because paying staff in shares is a real cost to owners.
Diluted shares outstanding. From the income statement or the front of the annual report.
Share price. Today's price.
Net debt. Total debt minus cash. Enter a negative number if the company has more cash than debt.
For cyclical companies, use a five-year average of operating cash flow and capex. A single boom year will make almost any cyclical stock look cheap.
The Formulas
Measure | Calculation |
Free cash flow | Operating cash flow − capex − stock-based compensation |
FCF yield (equity) | Free cash flow ÷ market capitalisation |
Price / FCF | Market capitalisation ÷ free cash flow |
Price for a 5% yield | FCF per share ÷ 0.05 |
EV FCF yield | Free cash flow ÷ (market cap + net debt) |
Price to FCF is simply the yield turned upside down. A 5% yield equals 20 times free cash flow.
Why 5%?
A 5% FCF yield means the business produces enough cash to return 5% of your purchase price every year, before any growth. If that cash grows even modestly over time, your total return can comfortably beat government bonds.
It is a starting point, not a law. A company growing FCF at 12% a year can be worth buying at a 4% yield. A shrinking business can be a trap at 10%. That is why Criterion 5 also accepts a price at least 25% below a conservative DCF value.
Equity Yield vs Enterprise Value Yield
The equity yield divides by market capitalisation only. The enterprise value yield adds net debt, because a buyer of the whole company would take on that debt.
When comparing two companies, the EV yield is fairer. A heavily indebted company can show a high equity yield simply because debt has shrunk its market value. If the two yields differ a lot, check the balance sheet against Criterion 4 in our guide to long-term debt.
Common Mistakes
Forgetting stock-based compensation. Many technology companies look far cheaper on reported FCF than they are. Subtracting it gives you the owner's view.
Using basic instead of diluted shares. Diluted shares include options and convertibles. Use them to avoid overstating per-share cash flow.
Treating growth capex as maintenance. Some capex is spent on growth, not upkeep. If you can estimate maintenance capex, your owner earnings figure will be more accurate. Our guide to free cash flow explains the difference.
Frequently Asked Questions
What is a good FCF yield? For a quality business, 5% or more is attractive on the Gingernomics standard. Below 3% usually means the market already expects strong growth.
Is FCF yield better than the P/E ratio? Often, yes. Earnings can be flattered by accounting choices, while cash is harder to fake. Compare both using our guide to the P/E ratio.
Can FCF yield be negative? Yes, if the company spends more than it generates. A negative yield fails the price test automatically.
Your Next Step
Score the whole company with the Five Criteria scorecard.
Build a full value estimate with the DCF intrinsic value calculator.
Learn every valuation method in what is stock valuation.
About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.
The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.
Comments