Deferred Revenue Index
Deferred Revenue is an account created on a company’s Balance Sheet when a customer pays for a product or service before it is delivered. Typical companies have Accounts Receivable on their Balance Sheets, since these companies receive payments from customers only weeks or months after the product or service is delivered. Why does this matter? Receiving payments upfront obviously has positive cash flow implications. But also – and perhaps more importantly – the ability to charge a customer upfront is generally a “signal” of strong differentiation for a company’s product or service.
Efficient Alpha Capital believes that companies with higher Deferred Revenue balances (as a percentage of revenue) generally have more attractive financial profiles and can present superior investment opportunities. Therefore, the Efficient Alpha Capital Deferred Revenue Index selects companies on the basis of Deferred Revenue as a percentage of revenue, with a valuation overlay that attempts to exclude companies that may be over-valued despite their Deferred Revenue attributes.
Free Cash Flow Index
Free Cash Flow is defined based upon the following formula: Cash Flow from Operations less Capital Expenditures. Free Cash Flow can be a more meaningful metric compared to other measures of a company’s fundamental financial performance. First, Free Cash Flow measures the ability to deliver what is most important to a shareholder: excess cash that could be distributed to shareholders. Second, Free Cash Flow is a financial metric that is less susceptible to manipulation or “false positives.” Most other financial metrics, taken by themselves and without a more comprehensive financial analysis, exclude critical elements of a company’s financial model.
Efficient Alpha Capital believes that companies with superior Free Cash Flow characteristics generally have more attractive financial profiles and can present superior investment opportunities. Therefore, the Efficient Alpha Capital Free Cash Flow Index selects companies on the basis of key Free Cash Flow-related metrics, with a valuation overlay that attempts to exclude companies that may be over-valued despite their Free Cash Flow profile.