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 cash flow per share than on earnings per share (EPS). While earnings per share can be 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.
- Cash flow per share functions as a measure of a firm's financial strength and is calculated as the after-tax earnings of a company plus depreciation on a per-share basis.
- By adding back expenses related to amortization and depreciation, a cash flow per share valuation keeps a company's cash flow numbers from being artificially deflated.
- Because cash flow per share represents the net cash a company produces, some financial analysts view it as a more accurate measurement of a company's financial health.
Understanding Cash Flow Per Share
Cash flow per share is calculated as a ratio, indicating the amount of cash a business generates based on a company’s net income with the costs of depreciation and amortization added back. Since the expenses related to depreciation and amortization are not actually cash expenses, adding them back keeps the company’s cash flow numbers 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
Cash Flow Per Share and Free Cash Flow
Free cash flow (FCF) is similar to cash flow per share in that it expands on the attempt to avoid artificial deflation of a company’s cash flow. The free cash flow calculation includes the costs associated with one-time capital expenditures, dividend payments, and other non-reoccurring or irregular activities. The company accounts for these costs at the time they occur as opposed to spreading them out over time.
Free cash flow provides information about the amount of cash that a company actually generates during the time period being examined. Because they view free cash flow as providing a more accurate snapshot of a company's finances and profitability, some investors prefer to evaluate a stock on its free cash flow per share instead of its earnings per share.
Earnings Per Share vs. 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. Like cash flow per share, earnings 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 are generally subtracted from a company’s net income, the outcome of an earnings per share calculation could be artificially deflated. Additionally, earnings per share may be artificially inflated with income from sources other than cash. Non-cash earnings and income can include sales in which the purchaser acquired the goods or services on credit issued through the selling company, and it may also include the appreciation of any investments or selling of equipment.
Since the cash flow per share takes into consideration a company's ability to generate cash, it is regarded by some as a more accurate measure of a company's financial situation than earnings per share. Cash flow per share represents the net cash a firm produces on a per-share basis.