Home etftrends.com Why Price-To-Book Ratio Doesn’t Reflect a Company’s True Value

Why Price-To-Book Ratio Doesn’t Reflect a Company’s True Value

Many value indexes rely on antiquated and less effective measures of value. For example, a company’s price-to-book (P/B) ratio heavily influences value for the Russell 1000, the S&P 500, and the MSCI USA Value.

But the P/B ratio doesn’t measure a company’s intangible assets, which contribute heavily to its value. So, Victory Capital argued on a VettaFi webcast that there’s a better metric for measuring a firm’s growth potential. And that’s its future free cash flow (FCF) yield.

FCF is the amount of cash a company has left over after covering all its expenses. And Scott Kefer, a senior portfolio manager for VictoryShares and Solutions, said investors should consider future FCF when seeking value.

“The real value of a company is the present value of its future free cash flows,” Kefer states. “It’s a sign of operating efficiency, it’s a sign of profitability, it’s a sign of quality.”

Target Strong Future FCF Yields With VFLO

This investment philosophy is the driving force behind the VictoryShares Free Cash Flow ETF (VFLO). Launched in June, 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, often used as a more comprehensive alternative to equity market capitalization.

The Index aims to select companies from the universe 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 strategy, visit the Free Cash Flow Channel.

Disclosure Information

All investing involves risk, including the potential loss of principal. 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.

Additional Information

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.

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.

newETFs.io respects the hard work of others and gives all credit to the remarkable folks at ETFTrends.com. This excerpt/article was pulled from their RSS feed; click here to view the original. Please note that on occasion, the RSS feed will not have the author. When this happens this site defaults the author to "News". Make no mistake, this excerpt/article was not created by newETFs.io, it was simply shared with you.