When evaluating stocks, most investors are familiar with fundamental indicators such as the 澳洲幸运5开奖号码历史查询:price-to-earnings ratio (P/E), 澳洲幸运5开奖号码历史查询:book value, 澳洲幸运5开奖号码历史查询:price-to-book (P/B), and the 澳洲幸运5开奖号码历史查询:PEG ratio. Also, investors who recog🅠nize the importance of cash generation use the company's cash flow statements when analyzing its fundamentals. They acknowledge that these sta🔥tements offer a better representation of the company's operations.

However, very few people look at how much 澳洲幸运5开奖号码历史查询:free cash flow (FCF) is available vis-à-vis the value of the company. Called the 澳洲幸运5开奖号码历史查询:free cash flow yield, it's a better indicator than the P/E ratio.

Free Cash Flow

Money in the bank is what every company strives to achieve. Investors are interested in what cash the company has in its bank accounts, as these numbers show the truth of a company's performance. It is more difficult to hide financial misdeeds and management adjustments in the 澳洲幸运5开奖号码历史查询:cash flow statement.

Cash flow is the measure of money into and out of a company's bank accounts. Free cash flow, a subset of cash flow, is the amount of cash left over after the company has paid all its expenses and capital expenditures (funds reinvested into the company).

You can quickly calculate the free cash flow of a company from the cash flow statement. Start with the total from the cash generated from operations. Next, find the amount for capital expenditures in the "cash flow from 澳洲幸运5开奖号码历史查询:investing" section. Then subtract the capital expenditures number from the total cash generated from operations to 澳洲幸运5开奖号码历史查询:derive free cash flow (FCF).

When free cash flow is positive, it indicates the company is generating more cash than is used to run the business and reinvest to grow the business. It’s fully capable of supporting itself, and there is plenty of potential for further growth. A negative free cash flow number indicates the company is not able to generate sufficient cash to support the business. However, many 澳洲幸运5开奖号码历史查询:small businesses do not have positive free cash flow as they are investing𒆙 heavily to grow their venture rapidly.

Free cash flow is similar to earnings for a company without the more arbitrary adjustments made in the 澳洲幸运5开奖号码历史查询:income statement. As a result, you can use free cash flow to help measure the performance of a company in a similar way to looking at the 澳洲幸运5开奖号码历史查询:net income line. (Free cash flow is not the same as 澳洲幸运5开奖号码历史查询:net cash flow, however.)

Free cash flow is the amount of cash that is available for stockholders after the extraction of all expenses from the total revenue. The net cash flow is the amount of profit the company has with the costs that it pays currently, excluding 澳洲幸运5开奖号码历史查询:long-term debts or bills. A company that has a positive net cꦦash flow is meeting operating expenses at the current time, but not long-term costs, so it is not always an accurate measurement of the company’s progress or success.

The P/E ratio measures how much annual net income is available per 澳洲幸运5开奖号码历史查询:common share. However, the cash flow statement is a better measure of the 𒀰performance of a company than the income statement.

Free Cash Flow Yield

Is there a comparable measurement tool to the P/E ratio that uses the cash flow statement? Happily, yes. We can use the free cash flow number and divide it by the value of the company as a more reliable indicator. Called the free cash flow yield, this gives investors another way to assess the value of a company that is comparable to the P/E ratio. Since this measure uses free cash flow, the free cash flow yield provides a better measure of a company's performance.

The most common way to calculate free cash flow yield is to use 澳洲幸运5开奖号码历史查询:market capitalization as the divisor. Market 澳洲幸运5开奖号码历史查询:capitalization is widely available, making it🎐 easy to determine. The formula is as fol𓆏lows:

$\text{Free Cash Flow Yield} = \frac{\text{Free Cash Flow}}{\text{Market Capitalization}}$Free Cash Flow Yield=Market CapitalizationFree Cash Flow​

Market Capitalization

Another way to calculate free cash flow yield is to use 澳洲幸运5开奖号码历史查询:enterprise value as the divisor. To many, enterprise value is a more accurate measure of the value of a firm, as it includes the debt, value of preferred shares, and 澳洲幸运5开奖号码历史查询:minority interest, but minus cash and cas🍌h equivalents. The formula is as follows:

$\text{Free Cash Flow Yield} = \frac{\text{Free Cash Flow}}{\text{Enterprise Value}}$Free Cash Flow Yield=Enterprise ValueFree Cash Flow​

Enterprise Value

Both methods are valuable tools for investors. Use of market capitalization is comparable to the P/E ratio. Enterprise value provides a way to compare companies across different industries and companies with various 澳洲幸运5开奖号码历史查询:capital structures.

To make the comparison to the P/E ratio easier, some investors invert the free cash flow🐻 yield, creating a ratio of either market capitalization or enterprise value to free cash flow.

Using Free Cash Flow Yield

As an example, the table below shows the free cash flow yield for four 澳洲幸运5开奖号码历史查询:large-cap companies and their P/E ratios in the middle of 2009. Apple (AAPL) sported a high trailing P/E ratio, thanks to the company's high growth expectations. General Electric (GE) had a trailing P/E ratio that reflected a slower growth scenario. Comparing Apple's and GE's free cash flow yield using market capitalization indicated that GE offered more attrac🌱tive potential at this time.

The primary reason for this difference was the large amo🏅unt of debt that GE carried on its books, primarily from its financial un꧂it. Apple was essentially debt-free. When you substituted market capitalization with the enterprise value as the divisor, Apple became a better choice.

Comparing the four companies listed below indicates that Cisco was positioned to perform well with the highest free cash flow yield, based on enterprise value. Lastly, Fluor had relatively a low P/E ratio that could be indicative of a value buy. But this thesis doesn't seem feasible when taking its relatively low FCF yield into account.

Liability Adjusted Cash Flow Yield

Although not commonly used in company valuation, 澳洲幸运5开奖号码历史查询:꧑liabil♏ity-adjusted cash flow yield (LACFY) is a variation. This fundamental analysis calculation compares a company's long-term free cash flow to its outstඣanding liabilities over the same period. Liability-adjusted cash flow yield can be used to determine how long it will take for a buyout to become profitable or how a company is valued. The calculation is as follows:

Average Free Cash Flow

$\begin{aligned} &\frac{10YAFCF}{[(OS+O+W) \times PSP-L]-(CA-I)}\\ &\textbf{where:}\\ &10YAFCF = 10\text{-Year average free cash flow}\\ &OS = \text{Outstanding shares}\\ &O = \text{Options}\\ &W = \text{Warrants}\\ &PSP = \text{Per share price}\\ &L = \text{Liabilities}\\ &CA = \text{Current assets}\\ &I = \text{Inventory} \end{aligned}$​[(OS+O+W)×PSP−L]−(CA−I)10YAFCF​where:10YAFCF=10-Year average free cash flowOS=Outstanding sharesO=OptionsW=WarrantsPSP=Per share priceL=LiabilitiesCA=Current assetsI=Inventory​

To see whether an investment is worthwhile, an analyst may look at 10 years' worth of data in a LACFY calculation and compare that to the yield on a 10-year Treasury note. The smaller the difference between LACFY and the Treasury yield, the less desirable an investment is.

The Bottom Line

Free cash flow yield offers investors or 澳洲幸运5开奖号码历史查询:stockholders a better measure of a company's fundamental performance than the widely used P/E ratio. Investors who wish to employ the 澳洲幸运5开奖号码历史查询:best fundamental indicator should add free🌠 cash flow yield to their repertoire of financial measures.

You should not depend on just one measure, of course. However, the free cash flow amount is one of the most accurate ways to 澳洲幸运5开奖号码历史查询:gauge a company's finan🗹cial condition.