Paper 01 · v1.0 · September 2026

After Halal screens, does cash generation still pay?

After banned businesses and AAOIFI debt limits, keep names that turn a large share of sales into free cash flow. Own them in proportion to size. This page is a reading of that backtest — not a forecast, and not a live-return target.

Read technical report Jump to findings

Scroll to read

Cash generation is a quality signal. Free cash flow is cash from operations minus capital spending. FCF margin is that cash divided by sales. A high margin means the business turns a large share of revenue into cash after reinvestment. That is not the same as cheapness.

Islamic equity screens add a second filter. AAOIFI caps interest-bearing debt, cash, and receivables relative to market value, and a separate activity screen removes banks, conventional insurance, alcohol, tobacco, gambling, and weapons. The hope is that those caps already strip out highly indebted firms, so that among what remains, cash generation is a cleaner quality signal.

That hope is not automatic. The screens change the sector mix. Any backtest that looks good after them may simply be riding the same mega-cap platform names that dominated 2023 and 2024.

How a Halal quality book is built

S&P 500

One change per step. Same tiles, new rule.

Start with the S&P 500

503 names. This is the listed universe, not yet Halal, not yet a quality book.

Start with the S&P 500

503 names. This is the listed universe, not yet Halal, not yet a quality book.

Drop banned businesses

64 names leave: banks, conventional insurance, alcohol, tobacco, gambling, weapons. 439 remain.

Apply AAOIFI ratio limits

Debt, cash, and receivables are capped against market value. Keep names with positive free cash flow. About 233 pass.

Keep the top half by FCF margin

Free cash flow divided by sales. Not cheapness. The live cut is cash generation, owned in proportion to size.

Size becomes the weight

Cap-weighting makes Apple, Nvidia, and Microsoft large. The tiles that remain are a Halal mega-cap quality book.

The original design ranked Halal names by cheapness: free cash flow divided by enterprise value. That book missed Apple and Nvidia and lost to SPUS in the same window. The live rule dropped cheapness. It keeps cash generation, then cap-weights.

That rewrite used 2023–2024, so the headline results are partly in-sample. I keep that fact in view throughout.

Held

AAPL

FCF yield 2.8% — expensive on the old rule. FCF margin 27.8% — kept.

Held

NVDA

Passed Halal screens. The cheapness sort missed it. Cash generation did not.

Not bought

AMZN

Ranked 224 of 255 on FCF margin. Never in the live book.

Not bought

TSLA

Ranked 234 of 255. The screen working as written, not a data accident.

Three books, one window

Growth of $1, 3 Jan 2023 – 30 Dec 2024

Halal FCF qualityDrop high-volSPUSSPY

Axes first

Growth of $1 from 3 January 2023 to 30 December 2024. The sample is two calendar years, not a cycle.

Axes first

Growth of $1 from 3 January 2023 to 30 December 2024. The sample is two calendar years, not a cycle.

Without a quality cut

SPY, the all-stock benchmark, finishes near $1.59. That is 25.9% compound annual growth.

The Halal index

SPUS is the Halal large-cap comparison. It finishes near $1.72. Beating SPUS is not the same as beating “the” Sharia market.

Cash generation, cap-weighted

The live book finishes near $2.00 — 42.4% CAGR. It led in both 2023 and 2024. These are two-year annualized figures from a mega-cap bull market.

A quieter twin

Dropping the jumpiest fifth of names cuts CAGR to 34.3% and drawdown to −9.4%. Calmar stays similar. A robustness check, not a second product.

What the two years actually show

Finding 1: Total return

The cash-generation book led both benchmarks in a two-year mega-cap boom.

FCF quality

42.4%

CAGR · max DD -11.92%

SPUS

31.1%

CAGR · max DD -11.46%

SPY

25.9%

CAGR · max DD -9.97%

Calendar-year total returns
Year	FCF quality	S&P 500	SPUS
2023	49.1%	26.2%	34.2%
2024	35.5%	25.3%	27.7%

42.4% compound annual growth versus 25.9% for SPY and 31.1% for SPUS. The gap is large. The sample is two strong years. These CAGRs are not a forecast of 42% a year.

There is no down year in this window. Headline numbers use 3 Jan 2023 through 30 Dec 2024 only.

FCF-margin quintiles, CAGR %, live window

37.4%

35.8%

27.4%

11.6%

31.1%

Q1 highest FCF/sales · Q5 lowest. Live book ≈ Q1–Q2.

Five Halal buckets

Same universe, cap-weighted, split by FCF margin. Q1 is the highest cash generation. Q5 is the lowest.

Five Halal buckets

Same universe, cap-weighted, split by FCF margin. Q1 is the highest cash generation. Q5 is the lowest.

The top half leads

Q1 and Q2 are the two best CAGRs. That is why the live rule keeps the top half, not a single quintile.

Not a stair-step

Q5 still beat Q3 and Q4. Q2 had the best Sharpe and Calmar. Cash generation helped. It did not line up as a clean factor.

Finding 2: The factor itself

Higher FCF margin helped. It did not line up as a clean stair-step.

Inside the same Halal universe, Q1 and Q2 are the two best CAGRs, which supports keeping the top half. Q5 still beat Q3 and Q4. Q2 had the best Sharpe and Calmar.

The live book is roughly Q1–Q2 together, not a single quintile. Cash generation paid here. It is not a monotonic quality premium.

Average sector weight, quality book vs equal-weight Halal universe

Technology
51.5%
Communication
22.8%
Healthcare
12.0%
Energy
3.5%
Staples
3.2%
Industrials
2.9%
Cyclical
2.8%
Financials
2.7%
Materials
1.3%
Real estate
1.1%
Utilities
0.0%

Quality bookEqual-weight Halal

Compare to the Halal list

An equal-weight Halal S&P universe is much more balanced. Cap-weighting high-FCF names is the tilt.

Compare to the Halal list

An equal-weight Halal S&P universe is much more balanced. Cap-weighting high-FCF names is the tilt.

Technology takes the weight

Technology 51.5%. Communication services 22.8%. Together, about 74% of the book.

What is missing

Utilities are empty. Industrials, cyclicals, real estate, and staples are the main underweights.

Finding 3: What the book actually is

This is a Halal mega-cap quality and technology portfolio, not a diversified S&P clone.

Alpha vs SPY

9.56%

β 1.15 · R² 0.83

Alpha vs SPUS

7.97%

β 1.02 · R² 0.91

Technology plus communication services averaged 74.3% of weight. Apple, Nvidia, Microsoft, and the two Alphabet lines were a third of the book at year-end 2024. Versus SPUS the beta is 1.02 and R² is 0.91.

Without a sector-neutral twin I cannot split FCF margin from even more Apple, Nvidia, Microsoft, Alphabet, and Meta than SPUS already owned.

Finding 4: Friction

Trading costs and purification are small next to the headline. The construction issues are not.

Turnover, annualized

99.9%

First build included. Later months often a few percent.

Cost drag at 10 bp

0.1%

Net CAGR 42.22%

Purification drag

0.01%

Lower bound on available tags.

Rebalances with holdings

Average names 110.9

A 10 bp cost stub cuts CAGR from 42.43% to 42.22%. Purification drag on available tags is about 1 bp. The serious issues are the in-sample rule change, Yahoo’s short cash-flow history, and double-counting GOOG with GOOGL.

Cheap FCF/EV was dropped because it lost to SPUS in this same window. 2023–2024 is partly in-sample for the live rule.

Robustness

Dropping the jumpiest fifth of the quality names cut CAGR from 42.4% to 34.3% and maximum drawdown from −11.9% to −9.4%. Calmar stayed similar (3.65 versus 3.56). That overlay still beat SPY and SPUS. It is a robustness check, not a second live product.

Quintiles inside the Halal pool are the other check. The top half leads. The bottom bucket is not last. If a later paper adds a sector-capped twin and that twin still beats SPUS, the quality claim has more to stand on. If it does not, the 42% CAGR in this sample is mostly the 2023–2024 technology tape.

Levers

The whole rule runs on a handful of named choices. Each row is marked data or assumption.

Lever	Value	Kind	Basis
Factor	FCF / sales	data	Yahoo annual cash flow, 90-day lag
Universe	S&P 500, 503 names	data	Current membership
Activity screen	64 names removed	data	Banned businesses
Debt cap	< 30% of 24-month market cap	data	AAOIFI Standard 21
Keep quantile	Top 50% of FCF margin	assumption	Live rule after FCF/EV was dropped
Weighting	Market cap	assumption	No optimizer, no name cap
Rebalance	Month-end	assumption	No intra-month stops

What this does not capture

No 2022, no 2008, no rate-hike recession, and no hold-out after a rule freeze.
Yahoo annual cash-flow statements typically store only a few years. The first invested date is 3 January 2023.
Sector exclusions use the current S&P list, not the 2019 membership file — survivorship in the universe.
GOOG and GOOGL are both weighted, so Alphabet is overweight versus a single-listing index.
No intra-month compliance monitor. A name that crossed the 30% debt line mid-month is held until month-end.
No sector-neutral twin, so the original question — whether AAOIFI debt caps amplify a quality premium — is not answered.

A cap-weighted book of AAOIFI-screened S&P 500 names with FCF margins in the top half beat SPY and SPUS in 2023–2024. The product shape is coherent. It was not a construction bug. It is also a mega-cap technology book, the quintiles are noisy, and the live rule was chosen after a cheapness sort failed in the same sample. The idea is worth a second paper. It is not ready to promote to a live mandate.