Free Cash Flow Per Share

Free Cash Flow Per Share

Investopedia / Laura Porter

What Is Free Cash Flow Per Share

Free cash flow per share (FCF) is a measure of a company's financial flexibility that is determined by dividing free cash flow by the total number of shares outstanding. This measure serves as a proxy for measuring changes in earnings per share.

Ideally, a business will generate more cash flow than is required for operational expenses and capital expenditures. When they do, the free cash flow per share metric below will increase, as the numerator grows holding shares outstanding constant. Increasing free cash flow to outstanding shares value is a positive, as a company is regarded as improving prospects and more financial & operational flexibility.

Free cash flow per share is also called: Free cash flow for [to] the firm. In this case, it is notated as FCFF. The selection of a name is often a matter of preference. It is very common to see it describes as FCF in the newspaper and FCFF in an analyst research note, although they're speaking to the same value.

Calculated as:

 Free Cash Flow per Share   =   Free Cash Flow #  Shares Outstanding \text{Free Cash Flow per Share}\ =\ \frac{\text{Free Cash Flow}}{\# \text{ Shares Outstanding}} Free Cash Flow per Share = # Shares OutstandingFree Cash Flow


Understanding Free Cash Flow

BREAKING DOWN Free Cash Flow Per Share

This measure signals a company's ability to pay debt, pay dividends, buy back stock and facilitate the growth of the business. Also, the free cash flow per share can be used to give a preliminary prediction concerning future share prices. For example, when a firm's share price is low and free cash flow is on the rise, the odds are good that earnings and share value will soon be on the up because a high cash flow per share value means that earnings per share should potentially be high as well.

Of the popular financial condition ratios, Free Cash Flow per Share is the most comprehensive, as it's the cash flow available to be distributed to both debt and equity shareholders. An alternative but similar ratio is Free Cash Flow to Equity (FCFE). Free cash flow to equity begins with free cash flow to the firm, but strips out interest expenses on debt-related instruments, as they're senior in the capital structure. This leaves the free cash flow available to equity shareholders, who are at the bottom of the capital structure.

Another key element of free cash flow measures is the exclusion of non-cash related items found on income and cash flow statements. Principally, depreciation and amortization. Although depreciation is reported for tax and other purposes, it is a non-cash item. And free cash flow measures are only interested in cash related items.