Forward Free Cash Flow Vs. Trailing Free Cash Flow

FCF yield attempts to calculate how much cash flow a company generates relative to the cost of acquiring that business. And according to Victory Capital’s Associate Portfolio Manager, Michael Mack, forward FCF offers a better indicator of a company’s long-term potential.

“We believe it’s the forward free cash flows that will drive a company’s value over time,” Mack said. “Therefore, incorporating forward-looking estimates can help give a clearer picture of its true valuations.”

See more: Is Free Cash Flow the Most Relevant Metric for Profitability?

Consider an American steel production company. This business is a cyclical company that often sees large swings in FCF based on changing economic conditions.

If one were to measure its current trailing 12-month FCF as of 6/15/2023 ¹, it would appear that they had a 14.3% yield. However, based on consensus analyst estimates, their next 12-month FCF may drop roughly 60%, leaving them with an FCF yield of 4.3%.

“Ignoring forward-looking estimates can lead you to buy a company based on past results that may not reflect the future free cash flow potential,” Mack said.

For investors looking to target companies with high FCF yields, the +VictoryShares Free Cash Flow ETF+ (VFLO B+) may be worth looking into.

Launched last month, VFLO tracks an index focused on large-cap companies with high free cash flows that are then filtered to select those with the most favorable growth prospects using trailing and forward-looking metrics.

For more news, information, and analysis, visit the Free Cash Flow Channel

1/ Source: FactSet
Free cash flow (FCF) represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets.

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