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Liability-Adjusted Cash Flow Yield (LACFY) Definition

Liability-adjusted cash flow yield (LACFY) is a common-stock valuation formula created and named by TheStreet's John DeFeo:

10-Year Average Free Cash Flow / (((Outstanding Shares + Options + Warrants) x (Per Share Price) + (Liabilities)) - (Current Assets - Inventory))

In essence, this formula is an ultra-conservative version (inspired by the writings of Benjamin Graham and David Dodd) of the commonly used FCF/EV formula. A shorthand version of the formula can be used for quicker, less conservative valuation assessments.

5-Year Avg. Free Cash Flow / ((Outstanding Shares x Per Share Price) + (Liabilities - Cash))

The formula -- best applied to large companies with relatively stable earnings -- provides a yield (%) that can be used to judge the attractiveness of a stock as compared to a "risk free" investment (like a U.S. government bond). If the liability-adjusted cash flow yield is at least 4/3 of the risk free rate, an investor can take comfort in having a margin of safety (albeit, a small one).

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