A financial ratio measuring the cash a company generates relative to its market capitalization. It is calculated by dividing the company’s free cash flow by its market capitalization, expressed as a percentage. For instance, if a company’s free cash flow is $10 billion and its market capitalization is $100 billion, the ratio would be 10%. This figure indicates the cash return an investor might expect from their investment, assuming the company distributes all its free cash flow.
The ratio is often employed as a tool for evaluating investment opportunities, providing a potential indicator of undervaluation or overvaluation. A higher percentage may suggest that a company is undervalued, as it generates a substantial amount of cash relative to its market capitalization. Conversely, a lower percentage could imply overvaluation. Examining historical trends of this ratio can also reveal insights into a companys ability to consistently generate cash and manage its capital efficiently. This examination is particularly relevant for large, publicly traded companies.