Free Cash Flow Yield
Candlefocus EditorA high free cash flow yield indicates that a company is able to generate cash from its operations, thus allowing it to have quick access to cash to cover any unexpected debts, or obligations in the event of bankruptcy. This is therefore an important factor for investors when estimating the financial health of a company. In contrast, a quickly declining free cash flow yield is a sign that the company may be struggling to generate enough cash and may not be able to meet its obligations. This kind of situation is usually accompanied by an increasing debt-to-equity ratio as the company uses more borrowings to meet its obligations.
Investors should also consider the current financial situation of the company when analyzing the free cash flow yield. If a company has recently reported a large profit, the FCF yield may be higher than expected, while a loss may lead to a lower yield. The level of funds reserved and set aside to meet future disruptions is also important.
Overall, the free cash flow yield provides investors with an idea of the company’s current financial position and its ability to meet short-term obligations. This is why investors prefer high free cash flow yields and should pay special attention to any signs of a declining free cash flow yield. Monitoring the FCF yield over time will give investors a better idea of a company’s financial security and whether or not the company is a good investment.