Home etftrends.com Beyond Earnings: Navigating Future Growth with Expected Free Cash Flow Yield

Beyond Earnings: Navigating Future Growth with Expected Free Cash Flow Yield

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.”

See more: “Forward Free Cash Flow Vs. Trailing Free Cash Flow”

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[1] 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.


[1] 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.

Dislosure 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. 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 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 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 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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