Regular FCF over 5 years: the eliminatory filter
2026-06-23 · By Lubin Danilo, founder of Lubin Investment
The method measures the 5-year FCF per share CAGR AND verifies that no year is negative. A single negative FCF over the period is eliminatory. Five years is the minimum window to cross a complete economic cycle and distinguish structural growth from a one-off effect.
- A good FCF (free cash flow — cash left after all expenses including capital expenditure) in 2026 alone is not enough: the method requires 5 consecutive years with no negative year.
- The 5-year FCF per share CAGR measures the average annual growth speed of cash generated per share — a single negative year makes this criterion eliminatory.
- 5 years covers at least one full economic cycle (recession + expansion) without data becoming too stale to represent the current business.
- This filter eliminates cyclicals (steel, energy, commodity semiconductors), one-hit wonders (COVID tailwinds, demand spikes), and artificially inflated FCF (asset sales, provision reversals).
- What it keeps: SaaS subscriptions, premium insurance, natural monopolies, recurring services — all businesses whose FCF grows structurally.
Why a good 2026 FCF is not enough
FCF — free cash flow, the cash that truly remains after all expenses including investments — can spike in a single year for one-off reasons: a commodity price surge, an exceptional contract, an asset disposal, an accounting provision reversal. None of that reflects the robustness of the business engine. Durability is the ability to generate cash consistently, year after year, regardless of market conditions.
Why 5 years: neither too short nor too long
Most economic cycles last between 4 and 7 years. A 5-year window therefore has a very good chance of containing at least one difficult period: a sales slowdown, a cost spike, a margin compression. If the company generates positive and growing FCF even during that trough, it proves the model is structurally robust. Why not 10 years? Data becomes less representative of the current company. 3 years? Too short to detect a disguised cyclical.
The dual criterion: CAGR AND no missing year
The method uses two complementary measures. The 5-year FCF per share CAGR — Compound Annual Growth Rate — measures growth speed. A 15% CAGR means FCF per share doubled in under 5 years. But a single fiscal year with negative FCF over the past 5 years is eliminatory. Not a penalty, not a lower score: outright exclusion from the selection. Negative FCF reveals the company consumed more cash than it generated — fundamentally incompatible with durability.
What this filter eliminates: cyclicals and one-hit wonders
Cyclical sectors — steel, fossil energy, commodity semiconductors — see FCF collapse when the cycle turns. Micron (MU) illustrates this perfectly: negative FCF in FY2023, then records in FY2024-2026 driven by AI/HBM demand. That is not durability, it is a cyclical spike. One negative FCF year = out of the selection, score 6/10. Nike (NKE) illustrates the other case: structural FCF decline over 3 years due to DTC strategy problems and the Chinese market. Score 2/10.
What this filter keeps: structural FCF business models
Kinsale Capital (KNSL) is the perfect 10/10 example: FCF per share growing every single year for 5+ years, not a single gap, not a single negative year. This specialty insurer generates cash mechanically through annual premium renewals. ServiceNow (NOW) also scores 10/10: 5 years of continuous FCF growth driven by recurring SaaS subscriptions. AppLovin (APP) as well — to monitor to confirm durability continues despite the high valuation.
| Ticker | Regular / Irregular FCF | Method score |
|---|---|---|
| KNSL (Kinsale Capital) | Regular — growing every year 5+ years | 10 / 10 |
| NOW (ServiceNow) | Regular — recurring SaaS, 5 continuous years | 10 / 10 |
| APP (AppLovin) | Regular — recent explosive growth | 10 / 10 (valuation to monitor) |
| MU (Micron) | Irregular — negative FCF FY2023, AI cyclical spike | 6 / 10 |
| NKE (Nike) | Irregular — structural FCF decline over 3 years | 2 / 10 |
Regularity as a compass, not a guarantee
This filter does not predict the future. A company with 5 years of growing FCF can see its model deteriorate in year 6. What the filter measures is past consistency — and past consistency is the best available indicator of structural robustness. It is not a certainty; it is a probability. My role with this method is not to tell you what to buy, but to help you understand what the numbers actually say about the quality of a company.
FAQ
Why is a negative FCF eliminatory rather than just penalizing?
A negative FCF means the company consumed more cash than it generated. That is fundamentally incompatible with the durability concept the method measures. A penalty would let cyclical or fragile profiles slip through. Elimination is the only consistent choice.
Why measure FCF per share rather than total company FCF?
FCF per share accounts for buybacks and dilutive share issuances. A company that dilutes shareholders can grow total FCF while making each share worth less. FCF per share is the correct measure of what each unit of ownership actually generates.
Is 5 years of regularity enough to identify a true compounder?
5 years is the minimum threshold. The best cases often show 7, 8, or 10 years of regularity. But 5 years ensures at least one full economic cycle has been crossed. Below that, the series is too short to be statistically meaningful.
Can Micron (MU) ever score higher despite its cyclical nature?
Yes, if Micron sustains positive and growing FCF for 5 consecutive years — requiring AI demand to permanently transform its financial profile. For now, the 5-year history still contains negative years. The score will evolve as new data comes in.
Does this criterion unfairly eliminate quality companies?
It can exclude a transforming company that had one genuinely difficult year. That is an accepted cost: the method prefers missing a good company over selecting a disguised cyclical. The rigor of the filter is precisely what gives value to the final selection.
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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).