I've written before about how the usual free cash flow number (operating cash flow minus capital spending) leaves things out, like the real cash companies spend to offset stock-based compensation, or data-center leases signed but not yet started. This week I wanted to look at it a different way in light of all the focus on the capital markets becoming a reservoir to tap by old and new companies. Directionally, is ranking companies by free cash flow an effective way to analyze them? It depends.

Average of the past and the near future

Taking an average of trailing 12-month free cash flow and estimated free cash flow over the next one year is a way of landing in between what they have actually done and what’s expected of them.

Average of past and future = (trailing FCF + forward FCF) / 2

Then, dividing the result by Enterprise Value (EV) provides a yield.

Est FCF yield = Avg past and future FCF / EV

EV is something I learned from value investors early in my career. They would use it to screen for ideas as they always prioritized quality. 

EV is defined as the company’s value, as measured by market cap, plus debt, minus cash, and is generally what an acquirer would pay for the business. Market cap alone can mislead. Take 2 companies with the same free cash flow and the same market cap, where 1 carries a lot of debt. Without an adjustment they can look similar. Enterprise value subtracts cash, since a buyer gets that cash back, and adds debt, since a buyer inherits it. That makes a yield comparable across companies with different balance sheets. Enterprise value corrects for that and also credits companies that are sitting on lots of cash. 

A company that just spent heavily to build capacity can look expensive on last year's cash and cheap on next year's. A company looking good on a trailing basis from a one-time release of working capital can look the opposite on a future basis. Blending the 2 aims to even it out.

After screening about 1,000 large US stocks, with trailing free cash flow, the consensus estimate for fiscal 2027, and enterprise value, about 35 of those cleared a 10% expected yield. Energy sits at the top, with a few software and payments names mixed in.

For energy refiners, for example, on trailing cash flow alone, 3 of them yield about 6.5% on average. Blend in what analysts expect and that jumps to roughly 16%. It cuts the other way too. An insurance company looks like a 24% yielder on trailing cash flow, but the forward number is a fraction of last year's, so the blend falls to about 14%.

A couple of cautions

1. Not every company has meaningful free cash flow to measure in this way. Banks, insurers, brokers and real estate trusts show up in my raw screen, but for them cash flow is noisy at best, since their “debt” and “cash” are part of their operations. So best to filter them out and approach them in a different way. 

2. It still doesn't fix other problems I’ve written about. Stock comp, leases, and other real cash costs are still hiding outside this measure. Expected free cash flow yield and owner's free cash flow answer different questions, and ideally you'd want both.

There's research that points the same direction. Richard Sloan's 1996 paper on accruals (“Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?”) found companies whose reported earnings that ran well ahead of their cash flows tended to disappoint later. Cash tends to be the more honest number. But "cash" still has to be the right cash, measured at the right time.

Can it possibly predict better returns ahead?

After taking out financials and real estate, since they rely heavily on debt funding, I sorted about 770 stocks into five groups by their expected FCF yield at the end of 2025 and looked at what each group returned in 2026 so far (black bars below). The cheapest on this measure did noticeably better than the most expensive: the highest-yield groups (on the right below) had median returns in the neighborhood of 9–12%, while the lowest-yield group returned under 3%. Working as one would hope.

Then I ran the same test one year earlier, and it fell apart. Sorting by yield at the end of 2024, the lowest-yield group actually did best in 2025 (green bar on the left), helped by a handful of names that more than doubled. 

So, the measure may tell you something about price versus cash for a stock, but it's not always a pure forecast for next year’s winners. Other factors like momentum and earnings growth expectations matter too. But it’s still worth looking at the gap. When trailing and forward cash flow differ by a lot, the gap is leaning on an analyst’s forecast, so it’s worth checking the details before relying on an estimate. I do believe free cash flow will be an important measure to watch as we go into 2027, rewarding those with consistent free cash flow again. Especially as funding through debt and equity issuance is more scrutinized.