What Does Cash Earnings Per Share Meaning?
Cash earnings per share (cash EPS), or more commonly called operating cash flow, is a financial performance measure comparing cash flow to the number of shares outstanding. Cash EPS differs from the more popular net profit measure, earnings per share (EPS), which compares net income on a per share basis.
Free of non-cash components, such as depreciation which is included in profit based EPS measures, Cash EPS may prove a more reliable gauge of financial and operational health.
The higher a company’s cash EPS, the better it is considered to have performed over a period. A company's cash EPS can be used to draw comparisons to other companies or trends in a company’s business.
Cash EPS = Diluted Shares OutstandingOperating Cash Flowwhere:
Earnings Per Share Explained
Understanding Cash EPS
When analyzing a company, a standard financial analysis technique compares cash flow from operations (CEPS) to reported net income. A common warning sign for aggressive revenue recognition often surfaces when operating cash flow starts to lag behind reported net income materially. When this happens, it may be a red flag for recognizing revenue too soon.
Being rather susceptible to accounting manipulation, basic EPS can be an unreliable measure of performance. As such, when evaluating a potential investment, investors such as Warren Buffet prefer cash based measures to guide their analysis.
More recently, stock buybacks, rather than stock dividends, have been an overwhelming popular method to return profits to shareholders. An argument can be made this helps increase EPS, by reducing shares outstanding, thereby helping corporate executives game earnings per share growth to juice performance-based compensation plans.
Being a more conservative measure of performance, cash EPS can eliminate some of these issues common to the greater use of financial engineering.
Benefits of Using Cash EPS
- CEPS is less prone to accounting manipulation, which offers a clearer picture of cash flow and real earnings. Added transparency is a sign of good corporate governance.
- CEPS shows investors on a per share basis how much profit each share generates. This helps identify incremental value.
- CEPS is not subject to the same short-term market focus seen with EPS.