The Most Important Metric in 2025 and Beyond

Over the past 18 months, investors have found themselves back in familiar territory – chasing growth. With mega-cap tech rebounding and AI hype everywhere, it’s easy to think the pre-2022 mindset has returned. But look a little deeper, and it’s clear the rules have changed.

Markets are adjusting to a world where money isn’t cheap, supply chains aren’t smooth, and capital raising is more difficult.

In this environment, narratives aren’t enough. Investors are asking harder questions: Can this company stand on its own two feet? Is it generating real, spendable cash, or just a paper profit?

There’s one metric that answers these questions better than most. It doesn’t make headlines like AI or rate cuts. But in 2025 and beyond, it could quietly become the market’s most powerful signal.

Why Free Cashflow Is Becoming More Important

While the market’s attention has recently swung back to growth, a quiet but powerful shift is reshaping the investment landscape. The return of inflation and geopolitical tension has reminded us just how fragile global supply chains really are – and businesses are responding.

The COVID-19 pandemic triggered a wave of onshoring and “friendshoring” as companies sought to reduce their exposure to international bottlenecks. That was just the beginning. Trump’s tariff announcement may have shocked markets, but it simply accelerated a broader trend: global trade is becoming more fractured, and friction is now part of the system.

Friction increases capital intensity. Building local infrastructure, holding more inventory, and diversifying supply all require more investment – and companies can’t currently rely on cheap capital to float them through. That brings us to the second, and perhaps more critical, shift: the end of free money.

In a world where interest rates are higher for longer, capital expenditure must be justified – and returns demanded. Investors may become more sceptical of long-duration stories (companies where most of their value is derived from cashflows far in the future) and instead favour businesses that can generate meaningful cashflows in the near term.

That doesn’t mean growth is dead. It just means it has to be earned – and preferably funded from within. Businesses with strong free cashflow don’t need to issue new shares or tap debt markets just to survive. They can fund their own growth, pay dividends, reduce debt, or reinvest – all without diluting existing shareholders.

What Is Free Cash Flow?

Free cashflow (FCF) is the amount of cash a business generates after covering its day-to-day operations and capital spending needs. Unlike accounting profit, which can be shaped by non-cash items and assumptions, free cashflow is derived from cold, hard cash. But that doesn’t mean that analysing it properly is always straightforward.

In that sense, FCF offers clarity when popular metrics – like EBITDA or NPAT – might muddy the picture.

Of course, not every dollar of free cashflow is created equal. Investors need to look under the hood to understand what’s really going on.

• Reported (or strict) free cashflow is the simplest form: operating cashflow minus capital expenditure and lease repayments. It's a helpful starting point, but can mask distortions from working capital swings or lumpy capex.
• Underlying or adjusted FCF attempts to strip out “one-off” costs – and sometimes that’s fair. For instance, a genuinely one-off acquisition probably shouldn’t distort long-term cash generation.
• ‘Fake’ underlying FCF, though, is where things get dicey. Some companies reclassify recurring expenses – like customer acquisition or product development – as one-offs. Serial acquirers are prone to excluding acquisition costs too, but ask yourself, can they grow at your expected rate without acquisitions?

This brings us to an example of a company with strong free cash flow: Fiducian Group (ASX: FID).

Fiducian Group stands out for voluntarily releasing its quarterly cashflow reports, and for the March quarter (Q3), the company reported operating cashflow of $6.2 million, with net investing inflows of $362,000 and lease principal repayments of $428,000 – giving us a strict free cashflow figure of $6.2 million for the quarter.

For illustrative purposes, let’s look at FY23. Strict free cashflow came in at $10.7 million, based on $14.3 million of operating cashflow, $2.0 million of investing outflows, and $1.6 million of lease repayments. Digging deeper into the composition of investing cashflows reveals a pattern: business acquisitions aren’t a one-off. While FY23 saw just $2.2 million in acquisition spending, FY22 included a much larger $8.1 million outflow. The pattern extends back several years – $6.9 million in FY19, for example – indicating that acquisitions are a core part of the growth strategy, not an exception.

In other words, it wouldn’t be reasonable to exclude them in calculating “underlying” free cashflow.

Fiducian’s market capitalisation is around $284.6 million*. Using the financial year-to-date strict FCF of $15.1 million (annualised to $20.1 million), that implies a free cashflow yield of 8.4%. Using last year’s strict FCF of $24.6 million gives an even stronger yield of 10.3%.

Importantly, this isn’t a flash-in-the-pan result driven by lumpy working capital or cost-cutting. FID’s business model is relatively capital-light, its growth has historically been internally funded, and its discipline around shareholder dilution stands out in the sector.

That said, no business is immune from change. Competitive pressures, market conditions, or regulatory shifts could impact both margins and flows. So, while the numbers look compelling, it’s important to consider whether it sustain this performance.

Free cashflow as a lens

In a world of higher rates and rising global uncertainty, the ability to generate reliable, sustainable free cashflow is no longer a bonus – it’s a prerequisite.

Companies that can fund growth internally, without tapping debt markets or issuing new shares, are positioned to thrive in this new cycle. But spotting genuine free cashflow (and distinguishing it from cleverly disguised accounting manoeuvres) takes more than just a quick glance at the cashflow statement.

If you want to learn more about a company we at A Rich Life like for its strong free cashflow generation, then I strongly recommend you check out our recent coverage of Fiducian Group!

For investors willing to do the work, free cash flow isn’t just a metric, it’s a lens. It can really help filter the resilient from the risky and the proven from the speculative.

*As at 15 April 2025.

Disclosure: The author of this article does not own shares in FID and will not trade shares for at least 2 days following the publication of this article. The editor of this article, Claude Walker, owns shares in FID, and will not trade shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).