Home etftrends.com FCF and Growth: Examining the Key Drivers of a Company’s Value

FCF and Growth: Examining the Key Drivers of a Company’s Value

Two key drivers behind a company’s value are important for investors to understand.

The first driver of value is the company’s free cash flow (FCF) yield. FCF is the cash a company has after paying its capital expenditures. Then, the company uses it to buy back stocks, pay dividends, or participate in mergers and acquisitions.

It’s important to note that future, not trailing, FCF drives returns and, therefore, value. Building upon FCF yields, the second component of a company’s value is the growth potential.

Michael Mack, Associate Portfolio Manager for VictoryShares and Solutions, said, “When investors compare two companies, many might assume the one with the lower valuation will be the more attractive investment opportunity. However, the other part of what determines how much a company’s worth is how fast it’s growing.”

He also shared that if an example of two companies with the same free cash flow yield, the better consideration would most likely be with the company that’s growing at a faster rate.

Identifying the companies’ growth rate is important for another reason. According to Mack, the company’s future free cash flow will be driven by its growth.

This combination of future free cash flow and growth is what differentiates the VictoryShares Free Cash Flow ETF (VFLO) from other ETFs in the free cash flow space.

Under the Hood of VFLO

VFLO provides three different core factor exposures: value, quality, and growth.

The fund seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index. The index aims to select high-quality companies by applying profitability screens to its starting universe¹. Additionally, VFLO’s underlying index uses historical and forward-looking metrics to pick firms with superior free cash flow yields and promising growth prospects.

See more: “The Difference Between a Quality Company & a Quality Investment

This Index calculates free cash flow yield by dividing the expected free cash flow by enterprise value. It derives expected free cash flow as the average of the trailing 12-month FCF and the next 12-month forward FCF.

Finally, VFLO’s growth filter selects the 50 stocks with the highest expected growth score, influenced by sales, EBIDTA, and long-term 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.


[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. 

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. 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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