Many investors often use earnings to measure a company’s profitability. But high free cash flow (FCF) yields can often indicate that a company is capable of sustaining long-term growth.
According to VictoryShares and Solutions Associate Portfolio Manager, Michael Mack, earnings can be “prone to accounting manipulation.” That’s why FCF yield may arguably be a better metric to gauge a stock’s growth potential.
FCF represents the cash a company generates after accounting for cash payments to support operations and maintain its capital assets. It allows companies to reinvest cash, pay dividends, or repay debts. Some investors believe it can also provide a better picture of a firm’s financial health than net income.
Generating More Cash Than Needed
In addition, companies with high FCF yields can tend to be self-sufficient. That’s because they generate more cash than they need to run their business.
“And this can be important in periods of volatility when issuing stock or debt can be very expensive,” Mack said on a webcast hosted by VettaFi. “Because they’re self-sufficient, they’re not reliant on the market for funding.”
The VictoryShares Free Cash Flow ETF (VFLO ) invests in profitable U.S. large-cap companies with high FCF yields. The ETF seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index¹.
The Index methodology looks to assess FCF based on a historic and forward-looking basis. The ETF’s Index identifies companies with a high FCF yield. These companies are then assessed based on a growth filter to eliminate some of the slower-growing names.
“You get value with quality characteristics,” Mack said. He added that within a comparison of the average annualized return and average annualized risk of FCF/EV to P/E, EV/Sales, EV/EBITDA, and P/B – FCF/EV has provided the best risk/return profile based on a 31-year period of analysis ended June 30, 2023².
Past performance does not guarantee future results.
For more news, information, and analysis, visit the Free Cash Flow Channel
VettaFi LLC (“VettaFi”) is the index provider for VFLO, for which it receives an index licensing fee. However, VFLO is not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of VFLO.
1/ This Index calculates free cash flow yield by dividing expected free cash flow by enterprise value. Expected free cash flow is the average of trailing 12-month FCF and next 12-month forward free cash flow. Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization.
2/ Source: Victory Capital analysis sources through FactSet; Analysis period 12/31/1991-6/30/2023. Universe utilized for analysis is the S&P 500 Index with equal weighted constituents (excluding Financials and Real Estate).
Disclosure Information
Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To obtain a prospectus or summary prospectus containing this and other important information, visit http://www.vcm.com/prospectus. Read it carefully before investing.
All investing involves risk, including the potential loss of principal. The Fund has the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited, and commissions are often charged on each trade. ETFs may trade at a premium or discount to their net asset value. The Fund invests in securities included in, or representative of securities included in, the Index, regardless of their investment merits. The performance of the Fund may diverge from that of the Index.
Investments concentrated in an industry or group of industries may face more risks and exhibit higher volatility than investments that are more broadly diversified over industries or sectors. Derivatives may not work as intended and may result in losses. Large shareholders, including other funds advised by the Adviser, may own a substantial amount of the Fund’s shares. The actions of large shareholders, including large inflows or outflows, may adversely affect other shareholders, including potentially increasing capital gains. Investments in mid-cap companies typically exhibit higher volatility.
The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. The securities highlighted, if any, were not intended as individual investment advice.
Distributed by Foreside Fund Services, LLC (Foreside). Foreside is not affiliated with Victory Capital Management Inc. (VCM), the Fund’s advisor. Neither Foreside nor VCM are affiliated with VettaFi.
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