Growth or FCF: how my investment method decides

2026-06-16 · By Lubin Danilo, founder of Lubin Investment

A company can grow fast while destroying value if it burns cash to get there. And a company can grow moderately while being an exceptional cash machine. My method wants both: growth AND solid FCF. But when you have to choose, real FCF beats reported growth. Here is why, with concrete examples.

• Revenue growth without solid FCF is a warning signal: the company may be expanding, but it is not creating real value for its shareholders.
• FCF (free cash flow) is the money genuinely available after all expenses, including capital investment. It funds dividends, buybacks, and future growth.
• My method scores both separately: growth matters, but FCF margin and capital return (Cash ROCE) matter even more.
• Paylocity (PCTY): 10.5% revenue growth plus FCF margin of 24.4%. That is the ideal profile: moderate growth but real, abundant cash.
• FCF is harder to manipulate than accounting profit. That is why I trust it more.

The false debate: growth versus value

For decades, analysts have opposed growth stocks (expensive but growing fast) to value stocks (cheap but stagnating). This debate has always seemed poorly framed to me. What I look for is a company that grows AND generates real cash. Not one or the other: both.

How a company can grow without generating FCF

This is the most dangerous case, and the most common in high-momentum technology sectors. A company earns 100 million in revenue this year and 130 million next year. 30% growth, impressive. But to get there, it spent 140 million. Its FCF is negative. It is burning cash to grow.

This situation can be temporary and acceptable: an early-stage company investing heavily to conquer a market can justify negative FCF for a few years, if the trajectory is clear and the unit economics (revenue per customer, acquisition cost) are sound. But if FCF remains negative or very low for five years despite strong revenue growth, the business model is not converting growth into value well.

I have seen many companies in this situation collapse in the stock market not at a bad revenue quarter, but at the first sign of growth slowing. Because their stock market value rested entirely on the promise of that future growth, not on existing real cash.

How a company can generate excellent FCF without explosive growth

This is the profile I prefer, often underestimated by the market. Paylocity (PCTY) is the perfect example right now. Its revenue growth is 10.5% last quarter, not spectacular. But its FCF margin is 24.4%. Of 1.73 billion in annual revenue, 421 million dollars end up as real cash. That cash funds buybacks, product investment, and a competitive position of strength.

Our method: we want both, but FCF wins

In my method's 10 criteria, I evaluate both revenue and FCF growth, but also FCF margin and Cash ROCE (capital return measured in real cash). For a stock to score 8 or above out of 10 in my screener, it must show both positive growth and solid FCF. If growth is weak but FCF excellent, I still accept the file. If growth is strong but FCF negative or very weak, the file does not pass. FCF is non-negotiable.

Why FCF is harder to manipulate than accounting profit

This is the most important technical reason for this choice. Accounting profit can be influenced in many legal ways: you choose to capitalize rather than expense a cost, you build or release provisions, you play with revenue recognition timing. FCF measures actual cash flows. Cash left the bank account, or it did not. That is why I always look at FCF over at least 5 years, not just the latest quarter.

If you want to see the companies in our screener that combine growth and solid FCF, with their quality score and updated P/FCF valuation, you can check them directly on our tool. That is exactly the filter I built to sort in seconds the files that are genuinely worth analyzing in more depth.

FAQ

Can a high-growth company with no FCF still be a good investment?

Yes, in specific cases: early stage with sound unit economics and a clear path to profitability. But that is a bet on the future, not an investment in present facts. My method prefers companies that have already demonstrated their ability to convert growth into cash.

What is the difference between FCF margin and profit margin?

Profit margin measures accounting profit relative to revenue. FCF margin measures cash actually generated relative to revenue. A company can have a 15% profit margin and a 5% FCF margin if it invests heavily in capex. FCF margin is more reliable.

What is Cash ROCE mentioned in the method?

Cash ROCE (Cash Return on Capital Employed) measures how much FCF a company generates for each euro of capital invested in the business. A Cash ROCE of 30% means that for 100 euros of invested capital, the company generates 30 euros of FCF each year. It is a powerful indicator of business model quality.

Why look at FCF over 5 years rather than a single quarter?

A single quarter's FCF can be misleading: a company can collect advance payments at year-end or delay supplier payments, artificially inflating short-term FCF. Over 5 years, these effects smooth out. The trend is what matters.

Is zero growth a dealbreaker in your method?

Not automatically. A company with no revenue growth but very high FCF and a low valuation can be an excellent yield opportunity. What I refuse is growth without FCF. The reverse (FCF without growth) is sometimes very good, depending on valuation and business durability.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).