The best yield-based valuation measure is a relatively little-known metric called cash return. In many ways, it’s actually a more useful tool than the P/E. To calculate a cash return, divide free cash flow by enterprise value. (Enterprise value is simply a stock’s market capitalization plus its long-term debt minus its cash.) The goal of the cash return is to measure how efficiently the business is using its capital—both equity and debt—to generate free cash flow.
