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Valuation

Free cash flow yield

Free cash flow divided by market value. It shows the cash return the business produces at today's price. Compare it to the 10-year Treasury bond. If it is lower, bonds pay you more cash at less risk. Above 5% is usually attractive.

Free cash flow is the cash a business has left after covering two things: its running costs, and the money spent on equipment to keep going (called capital expenditure, or capex). Take a bakery: it earns cash from customers, pays for flour, staff, and rent, then has to buy and replace its ovens. Whatever is left once both are covered is its free cash flow, the money genuinely free to reinvest, pay down debt, or hand to the owners. Free cash flow yield measures that spare cash against the price: a bakery worth $100,000 that produces $6,000 of free cash a year has a 6% yield.

Its strength is that it is hard to fake. Reported profit can be massaged with accounting choices, but cash is cash, so this yield is often a more honest read than profit.

On a steady business, 6% or more is usually attractive, and that bar rises when bond yields are high, since safe bonds then compete harder for your money. Below about 3% is expensive, and only worth it if the business is growing fast.

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