Free cash flow steadiness score
The free cash flow steadiness score tries to measure the level of variability in the company's free cash flow stream from one period to the next over the past seven accounting periods. Unlike other scores that attempt to measure the stability level of a particular variable based exclusively on the variance calculation, the Gradement steadiness scores use a modified version of the variance statistics named coefficient of negative variation. This coefficient, developed by Gradement, is an improved version of the one proposed by Benjamin Graham (Security Analysis, third edition). Unlike the variance, that considers both the up and down changes in the free cash flow, this coefficient only takes into account the negative variations.
How to use the score
A high value of this score will indicate that there have been no large downsides to the free cash flow in the last accounting periods and that, if any variation has occurred, most of them will have been upwards. A low value will indicate that most of the changes in the free cash flow have been downside.
The following table can serve as a reference for the use of this score:
|score value range||Interpretation|
|0 - 5||Large negative variation in free cash flow|
|5 - 7||Small negative variations in free cash flow|
|7 - 10||Stable or increasing free cash flow|
Importance of the steadiness scores
The valuation model used by Gradement is based on the use of past accounting variables to estimate the future evolution of the company. The past stability of these variables allows us to predict that such stability will be maintained in the near future, so that the value of the scores calculated by Gradement will be based on an expected behavior of the company and, therefore, will be more valid when making investment decisions based on thems.
The lack of stability in accounting variables, reflected in a low value of this steadiness scores, makes it difficult to estimate the future evolution of the company and therefore devalues the usefulness of the scores we calculate.
The overall Grade incorporates this Free cash flow steadiness score in its calculation so that the value indicated by the grade will increase with sufficiently stable free cash flow and will decrease otherwise.