When it comes to identifying value, typical fundamental metrics like price-to-earnings (P/E) or price-to-book (P/B) are often used. Both metrics rest on accounting outputs (reported earnings and book value), and accounting rules allow significant discretion in non-cash expenses, depreciation schedules and goodwill write-downs. In short, that discretion can mask deteriorating underlying health and produce misleading valuations. This is why free cash flow (FCF), the cash a business generates after accounting for capital expenditures needed to maintain or expand its asset base, may provide a clearer reflection of intrinsic value.Key Takeaways:
Accounting earnings can distort corporate health through non-cash expenses, whereas FCF measures true liquidity by accounting for capital expenditures required to sustain or expand operations.
Focusing on FCF yield filters out traditional value traps: companies that appear cheap on P/E multiples but suffer from hidden debt or inventory strain.
The VictoryShares ETF suite leverages FCF screening across large- and small-cap value, growth and international markets to screen for durable, capital-efficient businesses.
See More: Advisors Turn to VictoryShares as VFLO Reaches $10B, GFLW Crosses $1BThe Illusion of Earnings vs. the Reality of CashAccounting earnings measure profitability on paper. Conversely, FCF measures actual liquidity. A company can report positive net income while simultaneously burning through cash for various reasons, such as inventory build-ups or unpaid customer receivables. For example, a retailer that builds inventory pays cash upfront, but accounting rules keep those costs on the balance sheet until the goods sell, so reported net income can keep rising. If the inventory does not sell, that cash never comes back and FCF can turn negative. That shortfall signals liquidity strain well before earnings reflect the issue.
By contrast, asset-light tech companies or capital-efficient industrial firms often report modest earnings because large, non-cash depreciation and amortization charges weigh on reported profits. Yet their operating FCF can remain strong, providing the capital necessary to fund buybacks, clear debt or pursue strategic acquisitions intended to increase shareholder value.How Free Cash Flow Screening Can Filter Out Value TrapsIdentifying true value means more than finding companies that look inexpensive. P/E ratios frequently lure investors into value traps, which look cheap on trailing earnings but carry unrecognized capital liabilities or mounting debt. A FCF yield screen measured against enterprise value, rather than share price alone, counts that debt in the denominator, so leverage lowers a company’s score instead of hiding inside its P/E.
An FCF screen strips away these earnings distortions by focusing on the cash a firm actually generates. By measuring the cash remaining to reward shareholders or reinvest in core operations, FCF offers a clearer metric for separating durable, capital-efficient businesses from temporary market noise.VictoryShares Free Cash Flow ETF SuiteThat case raises a practical question: how can investors get exposure to companies exhibiting high FCF through a cost-efficient, liquid and transparent fund structure? VictoryShares and Solutions has a full suite of ETFs that provide a holistic offering across market caps, regions and styles of investing. The flagship ETF with an eye on value is the VictoryShares Free Cash Flow ETF (VFLO B+), which achieved a 5-Star Overall Morningstar Rating™ (out of 376 funds in the Mid-Cap Value Category as of August 30, 2026, based on risk-adjusted returns). Past performance is no guarantee of future results. The ETF tracks the Victory U.S. Large Cap Free Cash Flow Index, which screens the U.S. large-cap universe for companies with high expected FCF yield and attractive growth prospects.
For large-cap growth exposure, investors can opt for the VictoryShares Free Cash Flow Growth ETF (GFLW ) which tracks the Victory Free Cash Flow Growth Index, screening for companies that combine strong FCF generation with growth. With small-cap equities rallying in 2026, investors may want to consider the VictoryShares Small Cap Free Cash Flow ETF (SFLO ) for quality exposure within value-oriented small cap companies.
FCF methodologies can also be applied outside of U.S. borders. Investors can also gain international equity exposure through the VictoryShares International Free Cash Flow ETF (IFLO ) and VictoryShares International Free Cash Flow Growth ETF (GRIN ).Taken together, the suite rests on a single premise: cash is harder to manufacture than earnings. P/E and P/B depend on accounting judgments about depreciation, write-downs and the timing of revenue recognition; FCF asks a narrower question: What did the business keep after paying to sustain itself? It will not settle every valuation debate, but the companies that clear the fundamental screen behind these FCF Indexes have already produced the cash, not just reported the earnings.
For more news, information, and analysis, visit the Free Cash Flow Content Hub
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All investing involves risk, including the potential loss of principal. The market prices of securities may go up or down, sometimes rapidly or unpredictably, due to general market conditions, such as real or perceived adverse economic, political, or regulatory conditions, recessions, inflation, or changes in interest or currency rates. The Funds have the same risks as the underlying securities traded on the exchange throughout the day. ETFs may trade at a premium or discount to their net asset value. 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. Investments in companies in the industrials sector, including producers of durable goods and companies that process raw materials, may be adversely affected by changes in supply and demand for products and services, governmental regulation and changes in spending policies, world events and economic conditions. Investments in companies in the energy sector may be subject to substantial government regulation, as well as risks involving changes in energy prices, international political instability, and liability for environmental damage and accidents resulting in loss of life or property. The profitability of companies in the healthcare sector may be affected by government regulations and healthcare programs, fluctuations in the cost of, and demand for, medical products and services and product liability claims. The Funds may frequently change their holdings, resulting in higher fees, lower returns, and more capital gains. International investments can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic developments and can perform differently from U.S. investments. Investments concentrated in a single country, a small number of countries or a specific region may be particularly affected by adverse markets, rates, and events, which may occur in those countries and regions and typically exhibit higher volatility. IFLO and GRIN are new with a limited operating history. As a result, they do not have a record of performance or other dealings for prospective investors to evaluate when making investment decisions. Investing in companies with high free cash flows could lead to underperformance when such investments are unpopular or during periods of industry disruptions. The Funds could also be affected by company-specific factors that could jeopardize the generation of free cash flow. Index Funds invest 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. 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 of cash, may adversely affect other shareholders, including potentially increasing capital gains. Derivatives may not work as intended and may result in losses. The value of your investment is also subject to geopolitical risks such as wars, terrorism, trade disputes, 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. Diversification does not assure a profit or protect against loss.
The Victory U.S. Large Cap Free Cash Flow Index aims to select high quality companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly. This Index calculates free cash flow yield by dividing expected free cash flow by enterprise value. Expected free cash flow is the average of trailing 12-month FCF and next 12-month forward free cash flow. Enterprise value (EV) measures a company’s total value, often used as a more comprehensive alternative to equity market capitalization.
The Victory Free Cash Flow Growth Index focuses on high quality profitable companies that display a positive free cash flow trend. It selects larger cap companies with the highest free cash flow relative to invested capital that also exhibit higher growth.
The Victory U.S. Small Cap Free Cash Flow Index aims to select high quality U.S. small-cap companies from its starting universe by applying profitability screens. It then selects companies with the strongest free cash flow yield that exhibit higher growth. The Index is rebalanced and reconstituted quarterly.
The Victory International Free Cash Flow Growth Index measures the performance of profitable companies that generate high free cash flow from invested capital and display higher growth characteristics. The index is subject to sector and security weight constraints. The constituents are weighted by modified absolute momentum.
The Victory International Free Cash Flow index measures the performance of profitable companies in the developed world, excluding the United States, that generate high free cash flow from invested capital and display higher growth characteristics. The indices are subject to sector country and security weight constraints. The constituents are weighted by modified free cash flow yield.
Average P/E Ratio (trailing or last 12 months “LTM”) is the current price of the stock divided by the actual earnings per share for the past 12 months.
Price-to-Book is the ratio of a stock’s market value (price) to the value of total assets less total liabilities (book value).
Ratings are based on past performance, which is no guarantee of future results. Star ratings do not reflect the effect of any applicable sales load. The Morningstar RatingTM for funds, or “star rating,” is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Victory Capital Management Inc. has paid a standard fee to Morningstar for access to ratings data. Had fees not been waived and/or expenses reimbursed currently or in the past, the Morningstar ratings could have been lower.
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VettaFi LLC (“VettaFi”) is the index provider for VFLO, GFLW, SFLO, IFLO, and GRIN, for which it receives an index licensing fee. However, VFLO, GFLW, SFLO, IFLO, and GRIN are 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, GFLW, SFLO, IFLO, and GRIN.
