Cash Return ratio

The best yield-based valuation measure is a relatively little-know metric called Cash Return ratio. In many ways it’s actually a more useful tool than the P/E. To calculate cash return, divide free cash flow by enterprise value.

Cash Return = Free Cash Flow/Enterprise Value
= Free Cash Flow/(Market Cap + long-term debt – Cash)

The goal of Cash Return is to measure how efficiently the business is using its capital –both equity and debt-to generate free cash flow. Essentially cash return tells you how much free cash flow a company generates as a percentage of how much it would cost to buy the whole shebang, including the debt burden.

Cash Return is a great first step to finding cash cows trading at reasonable prices.

Check out Cash return ratio considerations in Opto Circuits stock valuation

You may also like to learn more on other yield-based valuation ratios like
Dividend Yield
Earnings Yield

Return from Cash Return ratio to Stock Market Basics