Course 402: Using Ratios and Multiples  
Cash Return  

The best yieldbased valuation measure is a relatively littleknown metric called cash return. In many ways, it's actually a more useful tool than the P/E ratio. You can calculate cash return by adding free cash flow (cash from operations minus capital expenditures) to net interest expense (interest expense minus interest income), and then dividing the sum by enterprise value (market cap plus longterm debt, minus cash). We add back interest expense to free cash flow so that capital structure doesn't impact cash return. Cash Return = (Free Cash Flow + Net Interest Expense) / (Enterprise Value) The goal of the cash return metric is to measure how efficiently the business is using its capitalboth equity and debtto generate free cash flow. In other words, cash return tells you how much free cash flow a company generates as a percentage of how much it would cost an investor to buy out the entire business. Let's use networking giant Cisco Systems (CSCO) as an example of how to use cash return to find reasonably valued investments. In October 2012, Cisco had a market cap of about $90.9 billion and carried $16.3 billion in longterm debt and $9.8 billion in cash on its balance sheet. Its enterprise value was $90.9 + $16.3  $9.8, or $97.4 billion. That gives us the first part of our ratio. The other half is free cash flow, adjusted for interest expense. In fiscal 2012, Cisco generated about $11 billion in adjusted free cash flow. Thus, our cash return on Cisco will be $11 billion/$97.4 billion, or about 11%. Next: The Bottom Line >> 
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