hey guys welcome to another episode with
me shashank udupa and in today's episode
i'm gonna talk to you about free cash
flow yield yes now free cash flow yield
is like a new topic that we're gonna
talk about and we're gonna understand
what free cash flow yield is so don't
worry about it i'm gonna break down
everything for you in very simple parts
in the entire video but what we're gonna
do today is we're gonna find out the
definition of free cash flow yield we're
going to find out how to calculate fcf
which is also known as free cash flow
we're going to understand what is cash
flow from operations also known as cfo
and we're going to understand its
correlation with capex which is capital
expenditure we're also going to look at
fcf yield and earnings yield and finally
i'm also going to show you a few
examples and then conclude so it's going
to be a power pack knowledge episode so
we're going to start this asap
[Music]
now what is the definition of free cash
flow right now free cash flow yield is
basically the free cash flows of a
business whatever the business can
produce free cash flow produce against
its current market value so
mathematically if i put in mathematical
terms free cash flow yield is basically
free cash flows divided by the total
market value of the company or it is
also like free cash flow per share
divided by the current market price of
the share now this is the mathematical
formula but you need to understand the
logic behind it the logic behind it
basically says if there's a company that
is operating and it has free cash flow
that all the money is free what is it
valued against its current market price
now we'll understand more about what
free cash flows are in the next segment
now what are free cash flows now free
cash flow is in any financial year in
any given financial year if a business
can generate any amount of cash after
removing all its expenses right that is
known as free cash flow so basically any
cash flow any cash generated from
operations any cash that is generated
from doing the business after removing
all the other expenses like capital
expenditure of the year that is known as
free cash flow now cash flow generated
from operations right mother doing
operating activity is basically known as
cash flow from operations or which we
also look at called as cfo cash flow
from operations now this basically takes
into all the cash that is coming and
that is being generated by the business
activity now it includes operating cash
income and cash expenses so let me give
you an example only the sales that
happen in a particular year are taken
into account similarly same way only the
expenses that happens in cash are taken
into account as well now by the way in
accounting terms there are some non-cash
accounting terms as well so the non-cash
items are basically like depreciation or
goodwill amortization now these things
won't be a part of the cash flow
statement because cash is physically not
going out of the company now they would
form a part of the cash flow statement
but they do not impact the cash flows so
depreciation and good will form a part
of the cash flow but they don't impact
the cash flow now there's another thing
called cash flow from investing or
financing so basically any cash flow
that is coming from investing or
financing will not be a part of cash
flow from operations which is cfo so
actually if you look at it there are
three types of cash flow one is cash
flow from operating activities or
operations cfo then we have cash flow
from investing activities which is cfi
and we have cash flow from financing
activities also so there are three
different type of cash flows if the
business is basically taking a loan or
it's making an investment into the
equity market or the debt market it
won't come under cash flow from
operations it will come under cash flow
of investing okay so just to make it
clear for you how to understand this now
if you understand what cash flow from
operation is free cash flow okay minus
kpex right now if you have a fair id of
cfo which is cash flow from operator
understand that free cash flow is
nothing but the cash flow from
operations minus the capex and what is
kpex now kpek's full form is basically
known as capital expenditure now capital
expenditure is basically the investment
a business does to acquire upgrade
maintain its physical assets or property
plant building technology equipment
anything like that that is known as kpex
so when you deduct this capex from the
cash flow from operations which is cfo
you get the fcf fcf is basically free
cash flow means all the money that i
made in a year i remove my capex which
is basically investing or upgrading or
maintenance of plants all that is done
usakebad whatever money that i have that
is known as free cash flow now each
business's aim is to get as much free
cash flow as possible because if this
free cash flow is a lot for a business
they can use this in the future to
invest or do a share buyback or maybe
give a lot of dividends bonus all this
is important so that is why a company
that is focusing on free free cash flow
which is fcf a greater amount is better
and if the company does it i mean if the
company goes negative fcf it is
considered bad right so ideally it
should just be uh positive fcf and
obviously here the greater the amount of
fcf that they can maintain like higher
cash flow free cash flow the market
value of the company will also keep
going up so this is why fcf for free
cash flow is very important now let's
understand what is free cash flow yield
versus earnings yield now for that we
need to understand how you calculate
free cash flow yield now we know what
free cash flow is right now free cash
flow yield if you calculate fcf yield it
is basically calculated by dividing the
free cash flow by the market value of
the company now earnings yield is
basically calculated by dividing the
earnings by the market value of the
company now why is this important right
now you will be like isn't earnings
yield better than fci field why are we
even looking at fcf field now fcf yield
is apparently considered a better metric
to estimate than earnings yield and the
reasons why fcf yield is considered
better is because the value of any
business is discounted value of cash
flow that it generates over a period of
time right if the company is going to
generate a lot of cash flow in the next
five years then the value of the
business can be determined by something
like that now earnings often hides the
strength and weaknesses of a company
whereas cash flow cannot hide the
strength and weaknesses of a company
because i know exactly how much money is
coming in and how much money is going
out so you can't hide from that element
now cash flows are the best indicator of
how well a business is run the business
can make a lot of revenues okay they can
make a lot of revenue a lot of net
profit but if that is not being visible
in the cash flow and at the end of the
day the company is not being cash flow
positive then it becomes a slight a
problem for the company and slight
problem for us as well but now let's try
to understand which industries we can
use fcf yield and where does it work and
where it doesn't work because there are
some industries that are very capex
heavy they have to invest a lot so that
there the fcf yield might not work now
if you look at any industry like fmcg
consumption it and it services you will
see positive cash flow is there over a
long period of time why because in these
companies the amount of revenue that
they generate they don't have to put so
much back inside like for example in the
id space the majority of the revenue or
the expenses for it is basically their
employees right it is manpower employees
so now but in fmcg yes there is a
certain amount of capex but one capex
investment can give a massive amount of
return over the long period of time now
if you look at other industries like
steel industry iron ore sugar and all
these cyclical industries kpix
requirement is very high right you have
to invest a lot in capex and that is why
fca yield metric will not work for them
let me show you infosys example now if
you look at infosys over a long period
of time you will see that the cash flow
from operating activity at the end is
around 23 000 crores whereas if you look
at the cash flow from investing
activities it is approximately around 7
300 crores now if you see this
towards the end you will see that the
cash flow from operations is
significantly higher than cash flow from
investing that means capex related
investments are a part of the cfi and we
can see from this that the cfo is so
high the operation cash flow is so high
from the cfi which is uh cash flow from
investing activity that means it is
comparatively good for us because now
they can make a lot of free cash flow
why because free cash was nothing but
cash flow from operations minus the uh
kpx right now if you check the details
infosys has a negligible capex
investment at this fi 21 year so if you
look at that cash flow from investing
activity is 7 300
but if you look at all that investments
purchase and investment sold it's
basically negligible it is not something
very big so this is why it is very
important for us to understand that if a
company is making a lot of free cash
flow from operations and less expenses
it is good for us over a long period of
time now the same way if you look at
this fcf is basically cfo minus apex so
if you look at it from info systems 23
000 crores okay minus 2 100 crores 23
000 crores was the cash flow from
operations minus two thousand one
hundred crores which is the capex
totally it is approximately twenty one
thousand crores is their free cash flow
the current market cap of infosys is
seven lakh twenty four thousand crores
so the fcf yield comes out to be
approximately around two point 2.92
which is fairly good it is not that bad
if you look at some similar things you
will find similar positive fcf wheel
business for companies like asian paints
and nestle why they're in the fmcg space
consumer play but if you look at
businesses like ntpc which is in the
power segment the cash flows will look
like this now look at the cash flows
here right they're making cash flow from
operating activities around again 24 000
crores but their cash flow in investing
activity is 30 000 crores it's much more
right why because they have to invest a
lot of money back to grow their company
prudent that we should not base our
decision on only this why because for
this particular business we cannot look
at fcf right for this particular type of
business now it makes sense to evaluate
business like infosys you know consumer
place why because the fcs yield is high
and everyone in the industry looks at
fcf yield no fcf yield only whereas in
these type of businesses people don't
look at it they look at projects order
books what is the revenue per order book
all that has been seen in the power
sector now it is very important to
understand and i'll come to a conclusion
and i'll tell you why something is very
important to understand now when you
look at fca field one core thing to look
at is the long-term trend why i'm
telling you look at long-term trend
don't just look at one year and be like
okay this is a great company look at how
it has been performing in the past
whether the cash flow is good whether
the free cash flow is impressive whether
the fca yield remains good and will it
continue to be in the future that is
something you have to definitely check
now guys i hope you've got a super idea
of what fcf is what fcf yield is why we
look at fca yield and not earnings yield
but again let me tell you something
right all these are different ways of
understanding a company right that means
i'm not saying that this is the only way
to analyze a company if this is not the
only evaluation metric you should look
at you should look at everything about
the company there are multiple tools
that you have to use for valuation this
is one of the tools or else what will
happen there's a very famous quote by
abraham master maslow which basically
says to a man with a hammer everything
looks like a nail right so for a person
who loves the stock market and you want
to find something everything will look
attractive so fcf yield is not the only
tool for judging valuation and it may
not work always also because sometimes a
company with higher fcf yield maybe due
to the company is not investing in the
future also right maybe it's not doing
kpecs and it's getting a lot of money or
maybe there is companies that are doing
good fcf but maybe they're over
investing for their aggressive future
right aggressive investing for the
future so the company is still good but
we'll see that from the fcf you'll be
like no this is not good so don't base
your decision on that so guys this was
today's episode i hope you guys learned
something uh i hope you guys could learn
something more than what you what you
started this video with so if you really
liked what you saw today i would love
for you guys to like this video share
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because there's amazing content coming
out every day right thank you guys this
is me shashank udupa signing off
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