Earnings Yield

Finance allah shmoop what is free cash flow Well it's

the cash a company produces and pretty much after everything

like whatever dot com has one hundred million bucks in

pre tax profits A tax bill of thirty milton at

them seventy million dollars in earnings But they also had

depreciation on their whatever stamping factory of ten million dollars

So in fact they generated eighty million dollars in cash

while having seventy million in earnings And no there were

no tricky things done in the year to draw down

inventory volumes to produce a lot more cash or any

other chick a nunnery here The company also has committed

to paying a dividend of five milic order or twenty

mil a year That dividend payment gets included in the

free cash flow calculation as well So after eighty million

in cash production from operations the dividend the company pays

out to shareholders then is taken out of that eighty

So the free cash number Yep sixty million bucks And

why does this number even matter Well if you go

old school on investing and think about what a share

of a given company buys you in the form of

earnings and cash or dead on the balance sheet this

year Next year in the next you can think of

whatever dot com in terms of having a free cash

flow yield That is if the company was valued at

a billion dollars and it had one hundred million dollars

of cash and one hundred million dollars of dead zero

net cash or debt And yes this is oh so

theoretical Well then the company would have a six percent

free cash flow yield right because it's generating sixty million

after everything over a bill so that sixty mill is

the free cash flow But investors get the free cash

flow in some form most likely justin accumulation of cash

on the balance sheet and then they also get another

twenty mill in dividends So add to that twenty million

dividends and assuming you get no growth or decline while

investors or buying in it a billion dollar valuation while

they be getting a total of eight percent of their

cash back in one form or another each year either

in just cash produced by the company free castle and

or that dividend or set another way the sixty million

free cash flow would presumably then just accumulate on the

balance sheet Adding value to the company is cash piled

up or would be used wisely in one form or

another presumably like to buy back stock or by competitors

or whatever other whatever's The key idea here is that

free cash flow is truly free It's not encumbered It

is an ode for dividends or other big sinking fund

obligations This year or other things it's free and available

for the company to do You know whatever they want 00:02:26.105 --> [endTime] with