Free Cash Flow Screen and Backtest

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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 Criterias

  • 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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10 responses to “Free Cash Flow Screen and Backtest”

  1. I’m nit picky, here are my comments:

    1. Additional advantage – companies can play games with earnings reports, depreciate something too slowly, increase/decrease allowance for uncollectible accounts, the list goes on. Cash is good because it tells us what actually happened.

    2. Average volume of 20k – I assume this is 20k shares per day? Would a dollar amount be more valid? 20k shares of a 10 cent stock is very different from 20k shares of a $10 stock, and so liquidity should maybe be measured in $ terms.
    .-= Ankit Gupta´s last blog ..Regent Communications Faces Uncertain Valuations for Bankruptcy =-.

  2. Rich says:

    great post. It’s good to see the rational on excluding things like ADRs, but why do you exclude Financials? Is their FCF skewed in some manner?

  3. Rocky says:


    Jae you can correct me if I am wrong on this, but I believe he excludes the financials because of his lack of understanding on how the work and generate money.


  4. Jae Jun says:

    @ Ankit,

    I didn’t want to put a limit on the price so I just kept it to 20k but your point is correct. No use in buying 20k shares if it is $0.001.

    @ Rich and Rocky,
    I exclude financials because there is no way of knowing how the fcf numbers come out.

    Financial companies isn’t something that can be analysed automatically as well. Way outside of my comfort zone.

  5. k007 says:

    what software are you using to do your backscreen?

    also do you have a list of the stocks during months when it performs subpar to the S&P. perhaps there are some common characteristics in the stocks which move the most. also buying every month as most people eventually do due to paychecks may also make a difference…70% drawdown is a little scary for large portfolios

  6. Zach says:

    Hello – great post, along with your other screens. Long time fan of dividend investing and looking to expand my traditional dividend picks with some good old school value investing (which usually go hand and hand I think). I am curious to your re-balancing strategy. How does your brokage cost play into your re-balancing? What are your triggers to sell?
    .-= Zach´s last blog ..Vanguard Index Fund vs. Vanguard Actively Managed Fund =-.

  7. Jae Jun says:

    Brokerage costs will definitely bite into the returns but if you use a discount broker such as zecco, it shouldn’t diminish returns much at all.

    Positions are sold with the new stocks on the list after 6 months.

  8. sim10 says:

    jae, can you share how you create a screen of this kind?

  9. mark says:

    Regarding the exclusion of changes in working capital in FCF calculations. What if FCF is actually increased by changes in working capital?The receivables and inventories were decreased and as a result, FCF was increased. In this scenario, do we have to remove the the decrease in accounts receivables and inventories in FCF calculation? I’m new to DCF and stocks for that matter, I would appreciate it a lot if you can help me understand some these things.

  10. Jae Jun says:

    There are two ways to calculation FCF. The standard FCF = Cash from Operations – Capex or the Owner earnings variation. The standard formula accounts for changes in working capital. The owner earnings version usually does not. To answer your question, choose a version that makes sense to you and be consistent. Analyze the company and make sure the FCF method makes sense.

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