Many investors look to growth as a metric for success. Some are all about valuation.

A rare few start where wealth creation actually begins: With current cash yield on equity creation cost. 

The fact is that corporate wealth creation is not driven by ideas, revenue, growth, or even profits alone. It’s driven by a multitude of variable;, the starting point of which is current free cash flow. This figure is the amount of money a business produces relative to what shareholders had to invest to create it. 

And that ratio – the current cash yield – is the foundation on which every other source of return is built. 

What “current cash yield” actually means

Current cash yield is not an abstract metric. It’s grounded directly in a company’s financial statements. If you take a company’s statement of cash flows, you begin with cash provided by operating activities. From that number, you subtract maintenance capital expenditures: the cash required just to keep the business running at its current level.

Cash from Operating Activities - Maintenance CapEx = Free Cashflow

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What remains is free cash flow.
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That free cash can be used to:

• Pay dividends
• Reinvest in organic growth
• Repurchase shares
• Or support external growth through new investments
  
  

Next, if you divide that free cash flow by the equity creation cost (aka the total equity shareholders actually had to invest over time), you arrive at the current cash yield. FreeCashflow ÷ Creation Cost of Company’s Equity = Cash Yield

I developed this concept early in The Value Equation, as equity creation cost is treated not as a market value, but as the true economic cost of building the business.

Apple: A brief case study of current cash yield

Few companies prove my point better than Apple.

In 2000, Apple was a nominally profitable personal computer company with an equity market value of just over $5.2 billion. What followed over the next decade was the result of extraordinary cash yield compounding on a relatively fixed equity base.

• The iPod, introduced in 2001, grew to 40% of revenues by 2006, capturing nearly 80% market share in portable digital music.
  
  
• The iPhone, introduced in 2007, displaced the iPod and grew to nearly 50% of revenue by 2011.
  
  
• Apple surpassed Exxon to become the world’s most highly valued company.
  
  

Following the COVID period of 2020, Apple’s cash yield improved even further. By 2024, Apple’s current equity cash yield reached nearly 60%, driven by highly profitable services revenue and aggressive share repurchases that reduced the equity base. And even that understates the performance.

By the end of 2024, Apple held more than $150 billion in cash and marketable securities – an amount exceeding both its equity at cost and its borrowings. When excess cash is backed out, the company’s current equity yield rises closer to 80%.

This is not “financial engineering” or some kind of fancy math trickery. It’s the direct outcome of a potent business model producing enormous free cash flow relative to what it cost to build.

Why current cash yield comes first

Current equity yields are the foundation of total return delivery.

And that’s because they enable 5 powerful outcomes:

1. Dividend payments
2. Reinvestment-driven cash flow growth
3. External growth funded by new equity raised at market value
4. Higher equity valuation multiples
5. Cash flow multiple arbitrage, where a business becomes worth many times more than it cost to create
   
   

Apple’s valuation multiple of roughly 25× means that its approximately $130 billion in equity creation cost supported an equity value of roughly $3.5 trillion. Over a 25-year period, that translated into nearly $3.4 trillion of shareholder value created above equity cost. Growth alone did not produce this outcome and neither did innovation. High current cash yields made everything else possible.

I maintain that no great business succeeds accidentally, because leaders design business models and current cash yield is one of the first considerations they have to respect.  High current yields create margin for error, preserve flexibility, and allow leaders to choose when and how to grow.

Know where the starting line is

Most people treat cash flow as an outcome of success, but The Value Equation treats it as the starting line.

Current cash yield should come before growth.

Before valuation.

Before scale.

If a business cannot generate strong current cash yields on equity creation cost, everything that follows is being built on a shaky foundation. But when current yields are high, the business earns the right to grow, to reinvest, and to compound wealth over time.

That’s where business wealth begins.

My YouTube Channel is your tour guide through the concepts in The Value Equation, like current cash flow, that smart entrepreneurs and business leaders use to their advantage.

Join us so you can learn to be business rich, as well.

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