Metric Explainer: Free Cash Flow Yield
How much free cash flow you get for every ₹100 invested at the current share price — the "real earnings yield" using cash, not accounting profit. "FCF Yield...
Simple definition
How much free cash flow you get for every ₹100 invested at the current share price — the "real earnings yield" using cash, not accounting profit.
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"FCF Yield batata hai ki current price pe invest karne pe actual free cash kitna milega. 5% yield = ₹100 invest pe ₹5 ka real cash profit."
Why it matters
- Cash-based valuation — unlike PE, FCF yield uses actual cash, not accounting profit
- Compare with bond yields — FCF yield > bond yield means the equity offers a cash premium
- Buyback/dividend potential — companies with high FCF yield can return more to shareholders
- Value investor favourite — Warren Buffett's "owner earnings yield" concept
Formula
FCF Yield = (Free Cash Flow per Share / Market Price per Share) × 100
OR
FCF Yield = (Total FCF / Market Cap) × 100
How to interpret
| FCF Yield | Interpretation |
|---|---|
| > 8% | Very attractive — strong cash generation at reasonable price |
| 5–8% | Good value — solid cash returns |
| 3–5% | Moderate — fairly priced |
| 1–3% | Expensive — priced for growth |
| < 1% or negative | Very expensive or cash-burning |
FCF Yield vs Earnings Yield
| Metric | Formula | Better when |
|---|---|---|
| Earnings Yield | EPS / Price (= 1/PE) | Quick comparison |
| FCF Yield | FCF per share / Price | Assessing real cash generation quality |
FCF Yield is generally lower than Earnings Yield for capex-heavy companies and higher for asset-light companies.
Common mistakes
Mistakes to avoid
- FCF can be volatile — one-year FCF yield may be misleading. Use 3-year average
- Growth companies have low or negative FCF — they're reinvesting; FCF yield penalises them
- Comparing across sectors — an IT company with 6% FCF yield may be fairly priced while a telecom with 6% may be cheap
- Ignoring maintenance capex — only growth capex should ideally be excluded for adjusted FCF
Real example
| Company | FCF (₹ Cr) | Market Cap (₹ Cr) | FCF Yield |
|---|---|---|---|
| TCS | 38,000 | 14,00,000 | 2.7% |
| Coal India | 18,000 | 2,50,000 | 7.2% |
| Tata Motors | 15,000 | 3,50,000 | 4.3% |
Coal India's high FCF yield reflects its mature, low-capex business. TCS has lower yield because of premium valuation, not poor cash generation.
Red flags
- FCF Yield < 1% for a mature company — very expensive or deteriorating cash flows
- FCF Yield dramatically different from earnings yield — investigate working capital or capex anomalies
- Negative FCF yield — company is burning cash; not generating free cash flow
Related metrics
- FCF — The absolute free cash flow
- PE Ratio — Earnings-based alternative (1/PE = earnings yield)
- Dividend Yield — The actual cash distributed to shareholders