This article is jointly written with my mentor Mr. Ted Theodore, and is also published in the Financial Advisor Magazine.

With the recent initial public offerings of Lyft, Pinterest and Uber, many investors have found themselves asking “should I invest?” One of the major concerns when a company goes public is whether they have a clear path to profitability. Sometimes that path can appear cloudy because they may be subject to significant fluctuations in response to numerous factors including lack of liquidity, market volatility and other factors unrelated to the operating performance of the issuer. But instead of guessing, we believe there might be a better way for investors to approach IPOs.

According to our proprietary research, free cash flow is a superior indicator in predicting stock returns across global equity markets and even for newly listed companies after the IPO. But first, what do we mean by “free cash flow?” Put simply, this is the cash a company generates from its operating activities after accounting for the capital expenditures needed to maintain its fixed assets.

Free cash flow is an important consideration when looking at a company because it avoids much of the discretionary aspect of Generally Accepted Accounting Principles (GAAP).

With the recent flurry of IPO activity, we decided to look at all IPOs with a market capitalization larger than US$1 billion that launched between May 1995 and March 2019. For the stock return, we use the month end date after an IPO as the starting point and then look at the next one-, three-, six- and twelve-month total returns.

First, we looked at the relationship between the stock return after the IPO and a company’s free cash flow generation. Free-cash-flow generation is defined as the annual free cash flow in the latest fiscal year report. The average performance of IPOs with positive free cash flow generation outperformed those without by 1.08%, 3.37%, 10.07% and 15.67% in the next one-, three-, six- and twelve-month periods.

Next, we looked at whether the trend of free cash flow has an impact on post-IPO stock returns. We defined free cash flow trend as the general direction (positive or negative) in which a company’s free cash flow is developing or changing. The average performance of IPOs with positive free cash flow trend outperformed those without by 1.08%, 3.37%, 10.07% and 15.67% in the next one-, three-, six- and twelve-month periods.

Lastly, we combined these two methods and got a more complete look at a company’s free cash flow conditions.

We found that companies with both positive free cash flow generation and free cash flow trend outperformed companies with both negative free cash flow generation and free cash flow trend by 24% on average, which is higher than the average 16% spread in next twelve-month return using a single measure.

We also found that companies with positive free cash flow generation but negative free cash flow trend produced a moderate 6.59% return in the next twelve months on average or 7.35% in the median, which is better than companies with negative free cash flow generation and positive free cash flow trend.

Investors who are considering diving into an IPO usually pay more attention to the popularity of the company than they do lifting the hood and getting a true picture of that company’s short- and long-term outlook. But our evidence suggests that fundamental factors are still providing real insight into how a stock might perform, even for companies that just launched a public offering.

Looking at the IPOs of the 30 largest companies by current market cap from May 1995 through March 2019, clear trends emerge about performance outcomes and a company’s free cash flow generation and free cash flow trend. For example, the five stocks in this group with the highest 12-month post-IPO return (Mastercard, Google, Synchrony Financial, Chicago Mercantile Exchange Holdings and ServiceNow) were all positive regarding their free cash flow generation and free cash flow trend. On the flip side, of the five worst-performing stocks on this list over their first 12 months (GM, Alibaba, MetroPCS, Philip Morris and HCA Healthcare) only one, Alibaba, was positive in its free cash flow generation and trend.

As we’ve seen in recent weeks, just because a company may have a bold-faced name or a large public profile, that doesn’t mean it’s guaranteed to outperform once it becomes part of the public markets. We believe free cash flow, in terms of both generation and the trends it can highlight—offers one potentially effective way of making educated and informed decisions about IPO investing that helps cut through the hype and shine a clearer light on how a company and its stock may perform over time and versus other newly public peers.