Free cash flow is a sustainable idea

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Experienced investors know that there is nothing certain in the financial markets. There is also no strategy that isolates portfolios 100% from downside risk, with the exception of cash.

Fortunately, investors can take steps to minimize these risks. An effective way to achieve this goal is to focus on balance sheets. Some exchange-traded funds, including FCF American Grade ETF (TTAC), suggest a way to do it. The “FCF” in the name of TTAC stands for “free cash flow”.

Novice investors rejoice because free cash flow is easy to define. Simply put, it is the capital that a business has left over that is not being used for expenses or taking care of other liabilities. Not all companies generate free cash flow in a comparable way, which confirms the usefulness of an ETF such as TTAC.

Another point to consider with TTAC is that the focus on free cash flow as a useful valuation metric built up over time, and it arguably has more momentum and resistance today than ever. previously.

“The trend towards wider acceptance of this criterion has been building since the early 1970s. Accelerating the trend have been several developments – including new financial reporting rules on matters such as foreign currency translation , earnings from equity, the allocation of interperiod income tax, and the capitalization of rental and interest costs – which put a greater distance between a company’s net income and its cash flows; the adoption of “liberal” accounting practices by some companies; and record levels of inflation,” according to a 1984 article in the Harvard Business Review.

This article makes some remarks on the varied and complex accounting standards, some of which are still used today. The fact is that some companies “game” with the system when it comes to accounting. This is another reason why a fund like TTAC is attractive. Either a business generates free cash flow or it doesn’t – it’s not a trait that can be “faked” on the balance sheet.

Adding to the appeal of TTAC as both a short-term idea and a long-term investment is the fact that many companies that are prodigious generators of free cash flow often make rewards for shareholders – buyouts and dividends – a priority. Companies that can fund dividends through free cash flow are less likely to be dividend delinquents and more likely to be regular payout producers over time.

For more news, insights and strategy visit the Free cash channel.
Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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