Posted on January 20, 2008 - by Jay

Free Cash Flow Yield or FCF

By: Jay

One advanced but quite useful financial ratio that has not been discussed on this blog is the Free Cash Flow Yield. This no. tries to determine how much return can an investor expect after the company has made its money and invested what it needs for future operations. It also gives an indication of how much the dividend yield could be.

This ratio is not called an advanced ratio for nothing. For those who think investment is easy, well sorry, you have to read maybe 5-6 posts on this blog in order just to understand this one. I have added the links on all the keywords. Anyways, here’s the basic.

A company generates cashflow based on its day-to-day operations. Eg. a hawker selling bar chor mee gets money fr his customers. This no. is called Cashflow from Operations.

Next, he needs to spend some of this cashflow on equipment to maintain its operations (bowls, knives, noodle cutting machine etc.) This no. is called Capex which is the short-form for capital expenditure.

When you deduct Capex from Cashflow from Operations, you get a no. called the Free Cash Flow. Basically, that’s what’s left that can be distributed to shareholders or to pay down debt. If the company has no debt, it’s basically money that can be paid to the shareholders.
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Related posts:

1. Enjoy Cash Flow and Capital Gain from Property
2. Investing for Cash Flow
3. Net Profit, EBITDA, Operating Cashflow and Free Cashflow in Dividend Investing