The free cash flow (FCF) is the operating cash flow less capital expenditures. It shows how much cash the business leaves after investments in property, plant and equipment. The free cash flow yield relates this amount to the market capitalization.
FreeCashFlow > 0 and FreeCashFlowYield > 0.05
How are free cash flow and FCF yield calculated?
Free cash flow = operating cash flow − capital expenditures
Critivest records capital expenditures as a positive amount, hence the minus in the formula.
What is the difference between earnings and free cash flow?
Earnings reflect income and expenses; free cash flow reflects cash flows from operations less capital expenditures. Depreciation, for example, reduces earnings without causing a payment in the same period. The timing of customer payments and investments can also mean that a company reports a profit but negative free cash flow. To compare the two, both values must cover the same period.
Free cash flow yield and price-to-free-cash-flow ratio
The free cash flow yield divides the free cash flow by the market capitalization. The price-to-free-cash-flow ratio works the other way round: market capitalization divided by free cash flow.
Free cash flow and FCF yield: a worked example
For the fictional Example Company:
| Operating cash flow of the last four quarters | EUR 3 billion |
|---|---|
| Capital expenditures | EUR 1.2 billion |
| Free cash flow | 3 − 1.2 = EUR 1.8 billion |
| Market capitalization | EUR 30 billion |
| Free cash flow yield | 1.8 / 30 = 0.06, i.e. 6% |
| Price-to-free-cash-flow ratio | 30 / 1.8 ≈ 16.7 |
What are the limits of free cash flow?
- Free cash flow fluctuates strongly: high investments in one year lower it, deferred investments raise it.
- Acquisitions of companies do not count as capital expenditures on property, plant and equipment.
- If free cash flow is negative, the free cash flow yield is negative too, and the price-to-free-cash-flow ratio is not meaningful.
- Stock-based compensation does not reduce the operating cash flow, although it dilutes the shareholders.
- For banks and insurers, cash flow says little, as deposits and loans shape it.
Using FCF yield as your own criterion
This condition is met if the free cash flow is positive and the free cash flow yield is above 5%. In conditions, you write rates as decimals with a point:
FreeCashFlow > 0 and FreeCashFlowYield > 0.05You set the limit yourself; 5% is an example, not a recommendation.
For comparisons with stock-based compensation, there are additional formulas such as
StockBasedCompensationToFreeCashFlow.
Which periods does Critivest use?
Operating cash flow and capital expenditures are totals of the last four quarters or, if four complete quarters
are not available, those of the latest fiscal year. The market capitalization is the latest stored market value. To
compare free cash flow with earnings, there is the FCF conversion (FreeCashFlowConversion), which
takes both from the same quarters or the same fiscal year.
Periods and missing values: Methodology.
Formula reference in Critivest
Name in conditions: FreeCashFlow
FreeCashFlow = OperatingCashFlow - CapitalExpendituresOperating cash flow minus capital expenditures over the last four quarters
Name in conditions: FreeCashFlowYield
FreeCashFlowYield = FreeCashFlow / MarketCapitalizationFree cash flow of the last four quarters divided by market capitalization
Name in conditions: PriceToFreeCashFlow
PriceToFreeCashFlow = MarketCapitalization / FreeCashFlowMarket capitalization divided by free cash flow of the last four quarters
Names used in conditions
OperatingCashFlow- Cash flow, last 4 quarters or fiscal year: Operating cash flow
CapitalExpenditures- Cash flow, last 4 quarters or fiscal year: Capital expenditures (positive cash outflow)
FreeCashFlow- Operating cash flow minus capital expenditures over the last four quarters
MarketCapitalization- Market capitalization
Related formulas
- P/E ratio (price-to-earnings ratio): The P/E ratio divides a company's market value by its earnings. Critivest calculates it from the market capitalization and the earnings of the last four quarters.
- Enterprise value: Enterprise value adds debt, minority interests and preferred stock to the market capitalization and subtracts cash and equivalents.
- Dividend yield: Dividend yield compares dividends paid with market value. Formulas and a worked example show how free cash flow covers the payments.
Sources
- IAS 7: Statement of Cash Flows, IFRS Foundation
- Free cash flow, Wikipedia
Last updated: November 4, 2026