Many investors and advisors peruse companies’ earnings statements to see if they’re on track to offer growth. However, traditional metrics like earnings or revenue growth often fail to identify which stocks have the most growth potential. “Many of today’s high-flying growth stocks were once deeply out-of-favor value stocks trading at high free cash flow yields,” said VictoryShares and Solutions Associate Portfolio Manager, Michael Mack. “The market tends to underestimate a company’s ability to reinvent itself and find new growth markets.”
A Clearer Picture of a Company’s Value
Compared to traditional metrics, expected free cash flow (FCF) yield may provide a more insightful measure of a company’s valuation. Unlike earnings, which accounting practices can manipulate, FCF represents the cash generated by a company that is available for distribution to investors, debt repayment, or reinvestment in the business.
FCF accounts for capital expenditures necessary to maintain and expand operations. A high FCF yield suggests that a company not only has strong earnings but also generates substantial cash relative to its market value.
So, rather than focusing on traditional valuation metrics or solely using historic measures of FCF, expected FCF yield may offer a clearer picture of a company’s financial health and cash-generating capabilities.
This metric is particularly valuable for assessing a company’s ability to reinvest in its operations, pursue strategic initiatives, and sustain long-term growth. It reflects a company’s financial flexibility and its capacity to weather economic downturns, invest in innovation, or return value to shareholders through dividends or share buybacks.
Capture Expected Free Cash Flow With VFLO
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 Index. This Index calculates FCF yield by dividing expected FCF by enterprise value.
Expected FCF is the average of the trailing 12-month FCF and the next 12-month forward FCF. Enterprise value measures a company’s total value and is often used as a more comprehensive alternative to equity market capitalization.
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.
Mack added that investors “don’t have to limit your horizon to the growth indexes to identify future growth leaders.
There are many companies that are out of favor today that may be the growth leaders of the future,” he noted. “You don’t always have to chase the shiniest new object to identify the strong growth companies of the future.”
For more news, information, and strategy, 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.
 The Victory U.S. Large Cap Free Cash Flow Index’s starting universe is the VettaFi 1000 Index which consists of market-cap-weighted U.S. large-cap stocks.
Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization. Enterprise value includes in its calculation the market capitalization of a company but also short-term and long-term debt and any cash on the company’s balance sheet.
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