May 232011
 

Cash flow is vital because if a business runs out of cash it may go bust even if it is making a decent profit. Equity free cash-flow is the cash generated each year for shareholders after certain "non-discretionary" expenses have been paid, such as interest on debt, tax and the capital expenditure needed to replace long-term assets as they wear out. What’s left is often called "free cash flow", which is then available to be used, perhaps to pay a dividend or expand the business. To turn this into an equity free cash-flow yield you divide it by the firms market capitalisation. The higher the yield the better. However, as with all ratios this can be meaningless in isolation and should be compared with the previous year and other companies in the same sector.

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