What is 'Cash Flow Per Share'
Cash flow per share is the after-tax earnings plus depreciation on a per-share basis that functions as a measure of a firm's financial strength. Many financial analysts place more emphasis on the cash-flow-per-share value than on earnings-per-share values. While an earnings-per-share value can be easily manipulated, cash flow per share is more difficult to alter, resulting in what may be a more accurate value of the strength and sustainability of a particular business model.
BREAKING DOWN 'Cash Flow Per Share'Calculated as a ratio, cash flow per share indicates the amount of cash a business has in its possession, based on a company’s net income with the costs of depreciation and amortization added back in. Since the expenses related to depreciation and amortization are not actually losses paid with cash, reentering them into the calculation helps keep the company’s cash flow from being artificially deflated. The calculation to determine cash flow per share is:
Cash Flow Per Share = (Operating Cash Flow – Preferred Dividends) / Common Shares Outstanding
Free Cash Flow
Free cash flow expands on the attempt to avoid artificial deflation of a company’s cash flow by adding the costs associated with one-time capital expenses, dividend payments and other non-reoccurring activity, as well as with other anomalous activity. This provides information about the amount of cash that was actually generated by the company during the time period being examined.
Earnings per Share and Cash Flow per Share
A company's earnings per share is the portion of its profit that is allocated to each outstanding share of common stock, and like cash flow per share, serves as an indicator of a company's profitability. Earnings per share is calculated by dividing a company’s profit, or net income, by the number of outstanding shares.
Since depreciation, amortization, one-time expenses and other irregular expenses may be removed from the company’s net income, the outcome of this equation may be artificially deflated. Additionally, earnings per share may be artificially inflated when income from sources other than cash is added to the equation. Non-cash earnings can include sales in which the purchaser acquired the goods or services on credit issued through the selling company, and it can include the appreciation of any investments.
Since the cash flow per share takes into consideration a company's ability to generate cash, it is regarded by some analysts as a more accurate measure of a company's financial situation than the earnings per share metric. Cash flow per share represents the net cash a firm produces on a per-share basis.