FCF / EV Yield (Free Cash Flow to Enterprise Value)
Definition
Free Cash Flow to Enterprise Value yield measures the cash return a business generates relative to its total economic value, including both equity and debt. It is our preferred valuation metric because it captures real cash generation regardless of capital structure.
FCF / EV = Free Cash Flow ÷ (Market Capitalization + Net Debt)How to Interpret FCF / EV Yield (Free Cash Flow to Enterprise Value)
A higher FCF/EV yield means the business generates more cash per dollar of total value, indicating a more attractive valuation. For high-quality compounders, we consider yields above 5% as attractive, 3–5% as neutral, and below 3% as expensive.
Why It Matters for Investors
FCF/EV yield is superior to P/E or EV/EBIT because free cash flow is harder to manipulate and reflects actual cash available for acquisitions, dividends, buybacks, and debt reduction. It is the most reliable long-term valuation metric in our framework.
Frequently Asked Questions
What is a good FCF/EV yield?
For high-quality businesses, above 5% is attractive, 3–5% is neutral, and below 3% suggests a premium valuation. Quality businesses rarely trade at double-digit yields.
How is FCF/EV yield different from dividend yield?
FCF/EV yield measures all cash the business generates relative to enterprise value. Dividend yield only measures cash paid out to shareholders. FCF/EV yield captures the full cash generation picture.
Why use enterprise value instead of market cap?
Enterprise value accounts for debt, giving a complete picture of what an acquirer would pay for the whole business. This makes FCF/EV yield a more comprehensive valuation tool than FCF/Market Cap yield.
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