The cash flow metric private equity loves and the stocks it helps uncover
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16 July 2026
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Free cash flow yield has a strong following among value and quality-oriented investors. It is seen as a cleaner measure of value than traditional valuation metrics like the PE (price to earnings) ratio.
Unlike reported earnings which are shaped by accounting choices like how to reflect the valuation of assets, when to recognise revenue, and whether to deduct certain items of spending, free cash flow is harder to manipulate.
What is free cash flow?
Free cash flow is the amount of cash left after deducting from sales, all operating costs, taxes, interest payments, investment in working capital (inventories and receivables) and capital expenditure, sometimes shortened to capex.
Quality-oriented investors like Terry Smith split capex into two parts. Maintenance capex is the part needed to keep the lights on and remain competitive while growth capex is the part related to expanding operations.
Fast growing companies tend to redeploy free cash into the business, with the goal of generating a return on that investment and increasing profits.
Because they use up free cash flow to invest, they often end up showing zero free cash flow.
This makes it hard to compare growing companies so, investors like Smith estimate maintenance capex and deduct that from operating cash flow. In doing so they can achieve the effect of looking at companies in a steady, ex-growth state.
How do you calculate free cash flow yield?
Free cash flow yield is simply free cash flow expressed as a percentage of market value or free cash flow per share expressed as a percentage of the share price.
For example, Unilever generated free cash flow per share of 415p in 2025 and dividing that by the recent share price of £45.47, gives a yield of 9.1%.
Though sometimes enterprise value, which is the market value with any debt or cash on the balance sheet added on or subtracted respectively, is used instead.
How do you interpret free cash flow yield?
Investors use a threshold yield to signal whether a company might be attractively valued. Terry Smith tends to compare a company’s free cash flow yield to the market’s free cash flow yield.
In his recent first-half report Smith stated that the weighted average free cash flow yield of his portfolio was 4.3% while the S&P 500 had an estimated yield of under 2%.
“Hopefully this reinforces the suggestion that we have not abandoned our strategy of seeking to own good companies at fair or better valuations,” wrote Smith.
Smith expects the companies he owns to grow their free cash flows, so he tends to think about free cash flow yield plus the expected growth rate in free cash flow as an approximation of expected investment returns.
Growth-oriented investors tend to use discounted cash flow models to calculate the theoretical value of a business, sometimes referred to as intrinsic value.
The concept of calculating intrinsic business value based on future cash flows was first mathematically formalised by John Burr-Williams in his seminal book: The Theory of Investment Value in 1938.
The idea was adopted and popularised by Warren Buffet and his business partner Charlie Munger. Decades before it became common practice on Wall Street, Buffett would spend hours scrutinising corporate cash flow statements.
Why private equity loves high free cash flow yields
Private equity investors often use free cash flow yield to search for potential takeover targets.
Because private equity firms borrow money from banks to make acquisitions, they look for companies which are moderately indebted which have high free cash flow yields.
This indicates a company can generate sufficient free cash flows to service a higher debt burden.
In summary, a high free cash flow yield indicates a company is generating lots of cash in relation to its market value. This could be a signal the shares are undervalued, or it could mean investors are questioning the sustainability of cash flows.
Searching for the highest free cash flow yields
As always, valuation metrics like free cash flow yield and PE are just starting points for conducting further research and they should never be used in isolation.
With that caveat in mind, we have searched the FTSE 350 universe, excluding investment trusts to uncover companies with the highest free cash flow yields.
The following table shows the highest free cash flow yields based on analysts’ average one-year forecast free cash flow forecasts.
To provide a wider perspective and sense check, we have also included year two free cash flow yields and one-year forward PE ratios.
Harbour Energy sees cash flow boost from big acquisition
Independent oil and gas company Harbour Energy has a cash flow yield of 35%.
This unusually high yield can be partly explained by the combination of a falling share price, linked to scepticism over the sustainability of high oil prices, and a transformational acquisition which has boosted oil production and cash flows.
The company recently completed the $11.2 billion acquisition of Wintershall Dea which turned Harbour Energy from domestic player into a global company with production assets in Norway, Germany and Argentina.
Harbour Energy recently raised its 2026 free cash flow guidance from $600 million to $1.4 billion, based on a Brent Crude price of $80 per barrel.
Harbour estimates a $5 change in the price of Brent oil impacts free cash flow by $150 million.
Endeavour Mining is showing capital discipline
Endeavour Mining sits on a 25% free cash flow yield which partly reflects the risks associated with the countries it operates in due to its gold mining operations in the Africa nations of Côte d’Ivoire, Burkina Faso, and Senegal.
There is some investor scepticism over the sustainability of the gold price which has rocketed from under $2,000 per ounce three years ago to its recent high of more than $5,200 per ounce.
The West African gold miner delivered record profits and free cash flows in the first three months through March, driven by realisation of high gold prices.
Between 2026 and 2028 the company expects to return minimum dividends worth $1 billion, provided the gold price remains above $3,000, and return $2 billion at prevailing gold prices, comprised of dividends and share buybacks.
Vistry is hit by a perfect storm
Housebuilders have faced the perfect storm in recent years created by rising interest rates which have reduced mortgage affordability and rising input costs which have impacted profitability.
Vistry has issued several profit warnings over the last two years and its latest warning in July was accompanied by the departure of its chief finance officer Tim Lawlor.
The company’s high free cash flow yield reflects a few factors including a falling share price, the shares are down around 80% over the last two years, and recent management actions to improve cash flow.
Vistry entered 2026 with around £600 million worth of unsold homes and to clear them, the company has been heavily discounting while also cutting back on buying land.
These actions are expected to result in a surge of cash flow in the short term.
The cash is expected to remain in the business to reduce debts, rather than be paid out to shareholders, after the company suspended share buybacks in May and dividends in March 2025.
The priority is to build a net cash position by the end of December 2026.
BP delivers reset strategy
Diversified oil and gas major BP has cut its annual capex budget to roughly $13.5 billion for the next couple of years while also targeting structural cost reductions of $4 to $5 billion.
These actions are expected to see a greater proportion of operating cash flows convert into free cash flows and partially explains BP’s 16% free cash flow yield. BP is targeting a growth rate of more than 20% a year on in adjusted free cash flows on average across 2026 and 2027.
Investor scepticism around BP’s pivot away from investing in the energy transition has impacted the shares which have underperformed peers over the last few years.
Activist investor Elliot Investment Management, which built a stake in early 2025 has urged BP to be more aggressive in its corporate overhaul including selling off underperforming refineries and retail networks.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
