Why Investors Should Look at FCF Instead of Earnings

Many investors parse companies’ earnings statements to see if they can offer growth. However, traditional metrics like earnings or revenue growth may fail to identify stocks with the greatest growth potential.

Compared to traditional metrics, FCF yield may provide a more insightful measure of a company’s valuation. Accounting practices can sometimes manipulate a company’s earnings, but FCF can be harder to inflate.

FCF represents excess cash generated by a company that is available for distribution to investors, debt repayment, or reinvestment in the business. It accounts for capital expenditures necessary to maintain and expand operations. Therefore, high FCF yields may suggest that a company generates substantial cash relative to its market value and produces strong earnings.

Furthermore, when looking at both trailing and forward FCF metrics, this holistic measure of FCF yield may offer a better picture of a company’s financial health. This metric may help investors evaluate a company’s ability to reinvest in its operations, pursue strategic initiatives, and sustain long-term growth. Expected FCF is the average of the trailing 12-month FCF and the next 12-month forward FCF.

Th VictoryShares Free Cash Flow ETF (VFLO ) may be a compelling opportunity for investors interested in focusing on companies generating attractive FCF. VFLO tracks the Victory U.S. Large Cap Free Cash Flow Index (the Index), investing in profitable U.S. large-cap companies with high FCF yields.

The Index methodology selects companies from a universe of U.S. large-cap stocks by applying a profitability screen. It then selects companies with the highest FCF yields that exhibit relatively higher growth potential based on trailing and forward-looking metrics.

Moving down the cap spectrum, VictoryShares Small Cap Free Cash Flow ETF (SFLO ) provides exposure to small-cap companies that generate healthy FCF. SFLO employs the same underlying strategy and process as VFLO; however, SFLO’s underlying index also incorporates liquidity requirements to maximize trading efficiency.

VFLO and SFLO can serve as solutions for investors looking to get more exposure to companies generating attractive FCF.

Earnings are a company’s earnings are its after-tax net income. This is the company’s bottom line or its profits.

Revenue growth is the increase in a company’s sales over a specific period compared to its previous earnings.

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.

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.

All investing involves risk, including the potential loss of principal. Please note that the Fund is a new ETF with a limited history. 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 ETF 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. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions The ETF could also be affected by company-specific factors that could jeopardize the generation of free cash flow. 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.

Additional Information

If a seed investor redeems its shares, it could negatively impact the Funds’ NAV, market price and brokerage costs. The ETF 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 ETF invests in securities included in, or representative of securities included in, the Index, regardless of their investment merits.

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. The value of your investment is also subject to geopolitical risks such as wars, terrorism, environmental disasters, and public health crises; the risk of technology malfunctions or disruptions; and the responses to such events by governments and/or individual companies.

The Victory U.S. Large Cap Free Cash Flow Index aims to select high quality companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly. 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.

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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