Manufacturing Cash
Stock investors typically monitor earnings closely, yet investors cannot “spend” earnings to buy food or pay rent. That is done with cash. Investors should consider an additional measure: free cash flow conversion. Free cash flow conversion measures the ratio of a company’s cash flow to net income, thus making it a more effective measure of cash generation for corporations.


  • Most companies generally produce less free cash flow than net income because they reinvest their cash in order to grow. The actual cash per share available to investors in any given year is usually less than the published earnings per share.

  • However, some companies generate more cash than others, meaning they have stronger free cash flow conversion. As shown in the chart, Growth companies have had stronger free cash flow conversion than Value companies.

  • Historically, the Technology, Health Care, and Consumer Discretionary sectors have ranked highest in free cash flow conversion while Utilities and Real Estate have ranked lowest.

  • Although the media generally reports on earnings, astute investors know that free cash flow conversion can be an important metric to analyze as well and a vital component in generating shareholder returns.

The views expressed are the views of Fred Alger Management, Inc. as of January 2019. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities.

This material must be accompanied by the most recent fund fact sheet(s) if used in connection with the sale of mutual fund shares. 

Risk Disclosure: 
Investing in the stock market involves gains and losses and may not be suitable for all investors. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Many technology companies have limited operating histories and prices of these companies' securities have historically been more volatile than other securities, especially over the short term. Technology companies may also face increased competition, government regulation, and risk of obsolescence due to progress in technological developments. 

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