Free Cash Flow and the Capital Allocation Flywheel + Weekly Roundup
Why some companies generate more wealth with every dollar they earn — and how to spot them early
Quick note: I’ve included a special roundup at the end of this post featuring last week’s free articles from the website. With the website paywall now removed, you have full access to the entire article archive — no restrictions, just high-quality investing research and education. Make sure to scroll to the end so you don’t miss anything. But first, let’s look at an insight that could help you find your next 3x, 5x, or even 10x investment.
How Great Businesses Get Stronger Over Time
Every long-term winner you've admired — the stocks that 10x, 20x, or more — shares a quiet but powerful trait. It's not flashy growth or a trendy product. It’s their ability to consistently generate free cash flow and reinvest that cash wisely. This is the foundation behind exponential returns. In this article, we unpack how a well-oiled capital allocation flywheel turns free cash flow into lasting wealth — and why you, as a value investor, should identify it before the market fully catches on.
Free Cash Flow: The Fuel That Powers Everything
Think of it this way: in your personal life, free cash flow is what’s left of your monthly income after you’ve paid for housing, groceries, insurance, and other necessities. What you do with this leftover cash determines how your future shapes up. You can pay down debt, invest in your future, or splurge on things that may set you back. Your capital allocation — your choices — will either grow your financial base or erode it over time. It’s the same principle businesses follow, just with more zeroes on the balance sheet.
In fact, free cash flow is sometimes referred to as the "owner’s earnings" — a term Warren Buffett often uses — because it reflects the cash that could theoretically be pulled out of a business without harming its operations. If earnings are accounting smoke, free cash flow is the fire. It represents real money the business generates after covering its basic operating needs — money it can use to strengthen itself. Without it, a company must borrow or dilute shareholders to grow. With it, management gains a world of options: reinvest in the business, reduce debt, pay dividends, repurchase shares, or acquire other companies.
But free cash flow alone isn’t enough. What matters most is what management chooses to do with it.
Smart Capital Allocation: The Multiplier of FCF
The difference between a decent company and a great one often boils down to capital allocation. Does management reinvest in high-return projects? Or squander the cash on vanity acquisitions and unprofitable expansions? Smart allocation multiplies the effect of free cash flow, turning each dollar into a future stream of many more.
Every free cash flow dollar has a job. When it’s well-employed, it brings back friends.
The Capital Allocation Flywheel in Action
Imagine a company that generates $100 million in free cash flow each year and reinvests it at a 20% return on invested capital (ROIC). The next year, that investment generates $20 million more. That $20 million can then be reinvested again. Over time, this flywheel gains speed, and the business grows stronger with every spin.
Profits rise. Competitive advantages deepen. Balance sheet strength improves. Valuation multiples expand as investors catch on.
This is compounding in its purest form — and it usually goes unnoticed until the stock has already multiplied.
How to Spot a Flywheel in Motion
You don’t need inside access to find these companies. You need to recognize the signals that show a flywheel is gaining speed. Look for rising free cash flow year after year. Prioritize companies with high ROIC and stable or expanding margins. Prudent and opportunistic capital returns — dividends and buybacks — are good signs, especially when paired with a clearly communicated capital allocation strategy. Companies that can fund growth internally and avoid reliance on external capital often indicate strong discipline.
Tools like DuPont analysis and return on capital metrics can reveal hidden compounding engines. Ultimately, you’re looking for a pattern: cash in, value out, cash in, value out — with increasing velocity.
A Real-World Example: Viatris and the Flywheel Effect
One recent company that exemplifies the power of this flywheel is Viatris VTRS 0.00%↑ . Born from the 2020 merger of Pfizer’s Upjohn division and Mylan, Viatris started with scale but also a heavy debt load and investor skepticism.
Fast forward to today: Viatris generates substantial free cash flow. Instead of chasing growth for its own sake, the company is methodically allocating cash across multiple levers. It is reducing debt, strengthening the balance sheet, and improving its credit quality. It is returning capital to shareholders through both dividends and stock buybacks. And it is investing strategically in higher-margin branded drugs and biosimilars.
Management has remained committed to financial discipline. Every capital decision is weighed carefully for long-term value creation. Over time, this measured approach compounds — and the flywheel turns faster.
What’s especially compelling is that Viatris is still in the early stages of its story. At less than five years old, the company is transitioning from a defensive cash-flow generator to a growth-oriented compounder. If it stays the course, this could be one of those businesses that quietly 3x or 5x while few are watching.
(The following is a Premium grade research report published for free)
When the Flywheel Breaks
Not every company gets capital allocation right. Poor decisions can turn free cash flow from a strategic advantage into a wasted opportunity. Watch for red flags: aggressive acquisitions without clear synergies, buybacks at inflated prices, rising debt with no corresponding returns, or declining ROIC despite growing cash flows.
A broken flywheel doesn’t just stall progress — it destroys shareholder value. As investors, you must stay alert to whether the wheel is accelerating or falling apart.
How to Use This Lens as an Investor
Free cash flow and capital allocation aren’t just accounting terms. They’re your compass. When they’re both pointing in the right direction, you're likely looking at a future compounder. Make these metrics central to your stock selection process.
In our Premium Portfolio, every holding must demonstrate strong free cash flow and disciplined reinvestment. It’s how we ensure that even if growth slows, value continues to build.
Final Word
The best businesses don’t need hype. They quietly use free cash flow to build lasting value. And when you catch them early — before the flywheel is widely recognized — you position yourself for extraordinary long-term returns.
If you want access to more of these under-the-radar compounders, join us now.
Weekly Roundup: Catch Up on Last Week's Top Free Articles
The following articles were published for free on my website. There is no paywall — the entire article library is now open and available for you to explore. If you missed any of last week's posts, I’ve rounded them up below. Each one offers timeless investing lessons and actionable ideas you can use right away.
Market Insights
Portfolio Management
How the Best Value Investors Allocate Capital Across Asset Classes (Without Guessing the Market)
Understanding Investment Risk: How to Protect Your Portfolio Without Killing Your Returns