What it is
FCF per share / share price. A 7% FCF yield means: for every $100 of stock you buy, the underlying business is generating $7 of distributable cash per year.Why it cuts through accounting noise
P/E uses reported earnings, which include non-cash items, accruals, and accounting choices. FCF yield uses actual cash that hit the bank.A software company reporting "5% earnings yield" but a "9% FCF yield" is genuinely earning more cash than its income statement shows - usually because depreciation overstates the real wear-and-tear on its capital assets.
A company reporting "8% earnings yield" but a "2% FCF yield" is a red flag. Reported profit isn't turning into cash. Possibilities: aggressive revenue recognition, accruing receivables that won't collect, capitalising expenses, or working capital build that signals weak demand.
How to use it
- > 8%: deeply cheap. Often value-trap territory but sometimes a real opportunity
- 5–8%: healthy yield. Most quality businesses sit here
- 3–5%: market average
- < 3%: pricing in significant growth - needs to deliver