FCF yield

Free cash flow yield is trailing free cash flow divided by market capitalisation, expressed as a percentage — the cash return the entire equity would hand its owners at today's price if the business neither grew nor shrank. A company generating two billion dollars of free cash against a forty-billion-dollar market value yields five percent.

The ratio is the price-to-free-cash-flow multiple turned upside down, and the inversion is the point: a multiple of 25 times becomes a 4 percent yield, which a mind trained on bonds can immediately place against the interest available elsewhere. The comparison cuts both ways, though. A bond coupon is a contract; free cash flow is an outcome. It can grow for decades — the reason equities beat bonds over long periods — and it can halve without notice, which no coupon does. The yield states the starting price of a claim, not the claim itself.

There is no universal threshold for what counts as attractive, and any page that offers one is selling simplicity. What can be said honestly: high-single-digit yields on stable, self-funding businesses have historically been the value investor's hunting ground; yields of two to three percent are only defensible when growth is durable and reinvestment earns high returns; and very fat yields — the mid-teens and beyond — usually mean the market expects the cash flow to fall. The last case is the important discipline: a double-digit yield is a question about durability, not a bargain by itself.

The denominator deserves a decision. Dividing by market capitalisation measures the yield to shareholders after interest has been paid — appropriate for most US-GAAP filers, where interest paid sits inside operating cash flow by rule; IFRS preparers are permitted to classify interest paid as a financing outflow instead, a filer-level choice worth checking before comparing free cash flow yields across 20-F filings at face value. Dividing instead by enterprise value, which adds net debt to the price, produces a leverage-neutral cousin better suited to comparing companies with very different balance sheets. A heavily indebted business can show a seductive equity yield precisely because the equity sliver is thin; the enterprise version deflates that illusion.

Every weakness of the numerator flows straight through. Free cash flow can be flattered by a year of starved capital spending or stretched payables, and inflated at cyclical peaks — a commodity producer or homebuilder often shows its fattest yield the year before the cash halves. Stock-based compensation is added back as non-cash, so companies paying heavily in shares report a yield their diluted owners never quite receive. A trailing-twelve-month figure smooths seasons, not cycles: reading the yield against five or ten years of the underlying cash flow is the honest habit.

Sector limits are the same as for free cash flow itself. For banks and insurers the measure is close to meaningless, since operating cash flow is not a clean concept for a lender. Real estate investment trusts are better read on funds from operations. The yield is at its most informative for ordinary operating businesses — manufacturers, retailers, software, services — where cash in and cash out mean what they appear to mean.

Moatkeep computes the figure as trailing-twelve-month free cash flow — cash from operations minus capital expenditures, from each company's own SEC filings — divided by market capitalisation, with the share count summed across share classes at each class's own price. The value is refreshed as prices move and revised when filers restate, and a negative trailing figure is shown as a genuinely negative yield rather than hidden, with dependent multiples marked not meaningful.

Buffett has described the ideal purchase as an "equity bond" whose coupon grows: pay a sensible starting yield on cash the business does not need to retain, and let the moat raise the coupon over time. Free cash flow yield is the starting coupon in that sentence. Whether it rises, stagnates or vanishes is decided by the quality of the business — which is the part the ratio cannot tell you.