Terry Smith, during the Fundsmith 2013 shareholder meeting , explains the FCF yield and how he uses it as a valuation tool.

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The FCF yield is the amount of cash a company generates( after all expenditures) divided by the companies enterprise value.

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Shareholders own the cash flow, even if the company might not pay back all of it to us via dividends, we take the view that we own them.

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Terry Smith compares the FCF yield to what he thinks the long bond yield should be .

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A rational investor investor would want the yield to be 1% over the expected rate of inflation. Thus the long bond yield should be around 4% .

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Thus Terry Smith will only buy companies with a FCF yield of 5% and above .

(Disclaimer: I’m not sure if Terry Smith still sticks to this method of valuation)