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Free Cash Flow Yield FCFY (Formula, Examples) | Calculation - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
to Wallstreetmojo friends today we are
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going to learn a concept that is free
cash flow yield FCFY what exactly
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this is seems to be quite interesting
one as you can see a graph over here we
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have a data of two companies one is
Amazon and one is Ford Motors free cash
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flow yield yield means the percentage so
you can see the blue is Amazon Amazon
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has a constant FCFY yield of 0.6% and
that of Ford Motors is 23.10
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what exactly is this
exactly what's the concept all about
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let's get into the nitty-gritty of the
same FCFY is basically a valuation
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metric which measures how much the extra
cash our company makes expected to make
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from the operation as a percent of the
company value so this ratio standardized
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the free cash flow of the company against
the market value of the you can say the
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market expected to make from its
operation as a percentage of the company
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value so this ratio basically
standardizes the FCF of a company
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against its market value and is similar
to earning yield you must have learned
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about earning yield except that it uses
free cash flow against its market
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against i mean from from the cash flow
statement rather than the net earnings
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and that's a good thing in itself okay
from the income statement higher the
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ratio okay higher the this ratio the more
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attractive is going to be the investment
since it gives the indicator indication
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that the investors are paying less for
each unit of the free cash flow now many
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stakeholders consider cash flow as more
accurate of the company's performance
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compared to the earning since cash flow
represents our forms ability to sustain
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its operations furthermore free cash
flow gives a company
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our flexibility
to increase its intrinsic value since
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the cash flow leftover can be used for
paying dividends and interest reducing
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the debt and acquisition in the future
investments so let's understand how to
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calculate calculate the free cash flow
yield now the free cash flow yield can
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be computed from the equity shareholders
perspective as well as from the firms
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for spectrum so equity and firm both
while computing the FCFY we need to
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make sure that the denominator and the
numerator are consistent with both of
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them being either equity equity value or
the firms value first we'll see the f
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FCF yield formula that is the FCFE
formula from the perspective of the you
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can say common equity shareholders free
cash flow yield calculated is calculated
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as something as follow now the formula
FCFF okay FCFY over here is equal to
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your free cash flow from the firm per
share that is the cash flow the free
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cash flow to the equity I'll just write
over here as the cash flow of FCFE
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per share divided by
the market price per share so this is
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going to the formula where FCFE over
here you can see at the very beginning
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is basically your net income so you can
say FCFE is equal to your net income
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plus any non-recurring you know expenses
less any non-operating income plus
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non-cash operating expenses and less
equity re investments
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non cash operating expenses are added
back since they are accounting expenses
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but not cash expenses further non
recurring on non operating income or
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expenses are excluded to derive
recurring cash flow from the core
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operations so for maintaining the
consistence in the calculation the
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equity reinvestment needs are subtracted
from the gross cash flow to arrive at
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the free cash flow that is available to
the equity holders so equity
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reinvestment the equity reinvestment is
going to be your CAPEX acts minus the debt
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okay it's going to be CAPEX less any
debt plus any change in the working
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capital right
you need to deduct any from this you
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need to deduct that is something that is
any new debt issue - any debt repayment
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close the bracket and less any
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you can say new preferred stock issue -
the preferred dividend so the net
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capital expenditure is considered over
here is considered to arrive at the net
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cash flow from the investment in the
fixed assets again since the increase in
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the working capital you can save
free up the available cash flow we are
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concerned with the cash flow changes due
to changes in the working capital so to
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the extent the firm finances this
reinvestment by mix of equity and debt
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and preferred equity debt holders and so
on and so forth within the total
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reinvestments are subtracted to arrive
at the reinvestment of the equity the
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second is your FCFF formula
free cash flow yield calculation from
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the firm perspective that is equity
preferred and debt holders is something
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like this FCFF is equal to your FCFE plus any
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interest expense right and as in that
interest expense is going to be 1-
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tax
okay you need to add any principal
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repayment - net debt and preferred
dividends so this is going to be the
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formula as n FCFY is going to be
FCFY is going to be your free cash flow
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to the firm / EV / the enterprise value and over here
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the enterprise value is equal to your
market cap that is your market cap
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market capitalization of the equity
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MC of equity plus the debt less the cash so the free
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cash flow calculation from the firms
perspective represents the free cash
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flow left to all the claim holders
against the investment made so here the
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investment is depicted by the enterprise
value which is the market value of the
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investments by all the investor of the
form while the market capitalization
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represents the market value of the
portion owned by the shareholders since we
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are considering all the claim holders we
need to add back the add back to FCFF
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all the payments that is made to the
lenders that is the amount of the debt
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lenders and he preferred shoulders like
interest expense net debt repayments and
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preferred dividends a simpler way to
caliber of calculating FCFF is
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subtracting the capital expenditure from
the operating cash flows in the cash
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flow statement so FCFF you can say the
operating cash flow right less the capital
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expenditures now you can see some data over here this
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is of Amazon cash flow yield see in case
of Amazon when considering the property
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plant and equipment the PPE okay in
acquisition under the capital and built
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to suit Lee's trailing 12 months FCFF
FY is negative it is negative as you
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can see - 0.91% was and 0.36%
in spirit of the company showing
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positive cash flows of 1.2 billion
dollars and 3.4 billion that is
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in financially or 17 and 16 in spite of
that you have your FCFY as negative
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okay so we can make the final conclusion
based on this examples and what we
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studied FCFY is an important financial
metric which provides a more vivid
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picture of the financial health of the
firm as compared to the net income the
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ratio is valuable as if it is relatable
to the value received against the
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investment made a company with a high
cash flow compared to its assets may be
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over price in the market leading to the
lower
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FCFY oh and and vice versa so FCFY helps
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in analyzing the strength of the firm
negative you can say a negative free
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cash flow yield or negative free cash
flow may indicate that the firm is not
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liquid enough in its operation and would
need external funding for continuing its
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operation so the continuous decline in
the free cash flow may impact the future
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earning growth in contrast the rising
free cash flow allows the companies to
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self-finance without resorting to any
costly external financing for growth
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runs grew those enhancing the
shareholder value so however you can say
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that FCFY cannot alone be considered
as the only metric for making investment
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decisions and firms in the high growth
rate for high growth phase may have a
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decent earning but the cash flow may get
fully consumed by capital expenditure
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hence this firms may report lower you
can say FCFY in spite of the promising
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growth prospects thank you everyone
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