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Why Free Cash Flow May Be the True Measure of a Company’s Value

Free cash flow (FCF) is the cash remaining after a company has paid its expenses, taxes, interest, and long-term investments. It can be used to invest in growing the business, buying back stock, paying dividends, and paying down debt. It’s also a crucial metric for assessing a company’s value.

If a company is generating positive FCF, it’s generating more cash than it needs to cover its expenses. That’s a sign of quality and operating efficiency.

See more: “See Tangible Results Targeting Intangible Assets”

A Company’s Value Is in its Future Free Cash Flow

VictoryShares considers FCF a more reliable metric than earnings, and non-cash charges, depreciation, or write-offs can have an impact. The team believes that a company’s value is the present value of its future FCF.

“The value of a business is based on its potential future cash flows,” said Michael Mack, Associate Portfolio Manager for VictoryShares and Solutions. That’s where the VictoryShares Free Cash Flow ETF (VFLO) comes into play.

VFLO invests in profitable U.S. large-cap companies with high FCF yields. VFLO seeks to track the performance of the Victory U.S. Large Cap Free Cash Flow Index.

The 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. Additionally, 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[1] of U.S. large-cap stocks by applying a profitability screen. It then selects companies with the highest free cash flow yields that exhibit relatively higher growth potential based on trailing and forward-looking metrics.

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

[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.

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.

Additional Information

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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