What are we looking for?
U.S. companies that generate exceptional free cash flow and that maintain strong balance sheets.
The screen
The S&P 500 Index has gained 9.2 per cent year to date, fuelled by a sharp rally since late March. Risks, however, remain elevated from the conflict in Iran and rising U.S. Treasury bond yields. Companies that generate substantial free cash flow and carry little to no debt tend to offer greater downside protection in volatile markets, as their operations are self-funding and less dependent on external financing.
This screen prioritizes two cash flow metrics alongside traditional filters. Free cash-flow conversion, defined as free cash flow divided by EBITDA (earnings before interest, taxes, depreciation and amortization), measures how effectively a company translates operating profits into actual cash. A ratio greater than 100 per cent is possible when companies have significant non-cash expenses such as stock-based compensation, which reduce reported EBITDA but do not consume cash, a common feature of asset-light businesses such as software platforms.
Similarly, free cash flow margin, calculated as free cash flow divided by sales, measures how effectively a company converts sales into cash.
Using FactSet’s screening tool, I identified U.S. companies with excellent cash generation and balance sheet strength by applying the following criteria:
- included in the S&P 500
- market capitalization greater than US$10-billion
- free cash flow margin greater than 25 per cent
- free cash flow conversion greater than 80 per cent
- net debt to EBITDA less than 1.5 times
- return on invested capital greater than 25 per cent
- analyst estimated one-year sales growth greater than 10 per cent
The seven remaining companies were ranked by a multifactor ranking of five metrics: free cash flow margin, free cash-flow conversion, net debt to EBITDA, estimated one-year sales growth and return on invested capital.
What we found
Palantir Technologies Inc., an artificial intelligence and data analytics platform company, ranked first with a free cash flow margin of 51.5 per cent and free cash flow conversion of 114.4 per cent, both above the group averages of 46.8 per cent and 101.4 per cent. The company reported first-quarter 2026 revenue of US$1.63-billion on May 4, an 85-per-cent increase year-over-year driven by accelerating adoption of its AI platform across government and commercial clients. Adjusted free cash flow reached US$925-million, a 57-per-cent margin, and Palantir ended the quarter with US$8.0-billion in cash and no debt. The company was also recently awarded a contract with the U.S. Department of Agriculture worth up to US$300-million to enhance farmland security and supply chain resilience, signalling that demand for its AI platform is expanding beyond its traditional defence and intelligence roots.
Arista Networks Inc., a cloud networking equipment provider for AI data centres and enterprise campuses, ranked second with a free cash flow margin of 54.4 per cent, the second-highest in the group. The company reported first-quarter 2026 revenue of US$2.71-billion on May 5, up 35.1 per cent year-over-year, driven by demand for its high-speed switching platforms that power AI training workloads. Arista carries zero debt against US$12.4-billion in cash and marketable securities. Management raised its full-year 2026 revenue forecast to US$11.5-billion and increased Arista’s AI networking revenue target to US$3.5-billion, reflecting confidence in continued hyperscale cloud spending on AI infrastructure.
Disclosure: The author personally owns shares of Palantir Technologies and Apple Inc.
The information in this article is not investment advice. The author assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Arjun Deiva, CFA, is an MBA Candidate at the University of California, Berkeley, Haas School of Business.