Free Cash Flow Screen and Backtest Strategy

Written by

Jae Jun

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Stock Screen Strategy and Backtest Series

Why Free Cash Flow Matters

Most business schools teach that it is earnings that drives free cash flow. On paper, this theory may look nice and proper, but in the real world, cash is king and cash is what you need to drive earnings.

When it comes to true profitability, forget earnings and EBITDA. FCF is by far the best number to refer to.

  • Free cash flow is the cash that a company is able to generate after paying off all of the bills, maintaining existing asset bases and pursuing future growth.
  • FCF is what enhances shareholder value and how dividends can be consistently paid.

With that said, it is clear that a company able to increase and generate FCF will appreciate in value as the intrinsic value continues to rise.

This is the basis of a screen which I call FCF Cows.

Backtest Criteria

  • 3 Year comparisons
  • 20 stocks held
  • Rebalanced every 6 months
  • Slippage 1%

Screen Criteria

  • No financial stocks
  • No ADR stocks due to all the incorrect data resulting from currency conversions
  • OTC stocks can now be included
  • Average volume is greater than 20k
  • FCF increasing for past 3 years
  • Annual FCF to Long Term Debt ratio is greater than the previous year
  • FCF to Long Term Debt is greater than 10%
  • EV/FCF is less than 10

FCF Cows Yearly Results

Color coding in the image above is to simply determine which of the two performed better.

FCF Cows Screen Results

Stocks that Pass the FCF Cows Screener

Before I show you the screener, click on the image below to get the best investment spreadsheet to help organize your thoughts and make things easier for you.

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Although these stocks passed the screen, it is always necessary to double check the numbers. The stocks below have been sorted by P/FCF.

Check out the rest of the stocks in the FCF Cows screener.


No positions in any stocks mentioned.

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