What is FCF Yield?
FCF yield measures how much free cash flow a company generates relative to its total value. Think of it as the "cash return" on a company's price tag. A higher FCF yield means more cash generation per dollar of valuation.
For public companies, FCF yield is calculated against market capitalization. For private startups, it is calculated against enterprise value (typically the post-money valuation from the last funding round).
Why FCF Yield Matters
FCF yield is one of the most important valuation metrics because it connects cash generation to price. A company trading at a 5% FCF yield generates $0.05 in free cash for every $1 of valuation, roughly comparable to a bond yield but with growth potential.
For startup founders, understanding FCF yield helps in two ways:
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Fundraising context. If you raise at a $50M valuation but only generate $500K in FCF, your FCF yield is 1%. Investors are paying a premium for growth. You need to deliver that growth to justify the valuation.
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Acquisition analysis. When evaluating potential acquirers or comparing your company to public comps, FCF yield shows whether a valuation multiple is reasonable relative to cash generation.
FCF Yield Formula
FCF Yield = Free Cash Flow / Market Capitalization (or Enterprise Value)
Expressed as a percentage:
FCF Yield = (Free Cash Flow / Enterprise Value) x 100
Some analysts use enterprise value (market cap + debt - cash) instead of market capitalization for a more complete picture that accounts for capital structure.
Interpreting FCF Yield
High FCF yield (8%+): The company generates significant cash relative to its price. May indicate undervaluation or a mature business with limited growth prospects.
Moderate FCF yield (3-8%): Balanced between cash generation and growth investment. Typical for established SaaS companies.
Low FCF yield (0-3%): The market is pricing in significant future growth. Common for high-growth tech companies.
Negative FCF yield: The company is burning cash. Expected for pre-profitability startups, but the path to positive FCF should be visible.
Example
A public SaaS company:
- Annual free cash flow: $120,000,000
- Market capitalization: $3,000,000,000
FCF Yield = $120M / $3B = 4%
For every $1 of market value, the company generates $0.04 in free cash. If a comparable company generates $80M FCF on a $1B market cap, its FCF yield is 8%, making it arguably cheaper despite the lower absolute numbers.
Startup Example
Your startup:
- Last round post-money valuation: $20,000,000
- Annual free cash flow: $400,000
FCF Yield = $400,000 / $20,000,000 = 2%
This tells investors they are paying a 50x multiple on your current cash generation. The implicit bet is that FCF will grow significantly as revenue scales and FCF margin improves.
FCF Yield vs Earnings Yield
Earnings yield uses net income instead of free cash flow. FCF yield is generally preferred because it reflects actual cash, not accounting earnings that may include non-cash items like depreciation and stock-based compensation.
FCF Yield vs Dividend Yield
Dividend yield only captures cash returned to shareholders. FCF yield captures all cash generated, including cash reinvested in growth. A company can have a 0% dividend yield but a 10% FCF yield if it reinvests all cash into the business.