Cash flow per share is a liquidity ratio to measure the company’s profitability by its shares.
This ratio is important to determine the liquidity and profitability of the company compared to its outstanding shares.
In this article, you will learn what cash flow per share is, its formula, how to calculate it, and an example. So let’s dive into the sea.
What is Cash Flow Per Share
Cash flow per share is a liquidity ratio which compares the company’s cash flow by its shares.
In other words, CFPS measures by dividing the company’s cash flow from outstanding shares.
Cash flow is calculated by subtracting preferred dividends from the company’s operating cash flow.
The cash flow per share formula is straightforward:
\text{Cash flow per share} = \frac{\text{Operating cash flow - Preferred dividends}}{\text{Weighted average outstanding shares}}
Also, CFPS is calculated by the company’s generated net income with add-backs of amortization and depreciation, divided by the company’s outstanding shares.
Many investors and analysts prefer to use the cash flow per share ratio rather than earnings per ratio because earnings per ratio can be easily manipulated, whereas it is difficult to do with CFPS.
CFPS is used by many groups of people such as investors and internal teams. If a company discovers it has a high cash flow per share, it means the company has surplus cash that can be used to pay dividends, settle debt, or reinvest in the company.
Investors also assess the likelihood of receiving dividends. A high cash flow per share indicates a higher likelihood of receiving dividends, while a lower ratio suggests the company may have a cash shortfall.
Calculate Cash Flow Per Share Formula
To calculate cash flow per share, you should understand its accounts briefly.
Operating Cash Flow: Activities related to the company’s core business are called operating activities, and its net cash flow is referred by operating cash flow.
Operating cash flow = Cash inflow – Cash outflow
Preferred Dividend: Refers to dividends paid to preferred shareholders.
Outstanding Common Share: It is the average outstanding share of the company for the fiscal year. It is accounted for as an average.
CFPS is calculated by dividing the company’s cash flow by its weighted average outstanding shares.
The formula for calculating cash flow per share is:
\text{Cash flow per share} = \frac{\text{Operating cash flow - Preferred dividends}}{\text{Weighted average outstanding shares}}
CFPS is also calculated by income after interest and tax and added back depreciation and amortization to be divided by the company’s outstanding shares.
Formula:
\text{Cash flow per share} = \frac{\text{Net income + Amortization + Depreciation}}{\text{Weighted average outstanding shares}}
Free Cash Flow Per Share
Many investors and analysts prefer to use free cash flow per share instead of cash flow per share.
Free cash flow is a more accurate version of the company’s operating cash flow. It subtracts capital expenditures to find out the actual liquidity of the company.
It helps to avoid artificially manipulated accounting methods. Free cash flow shows an actual generated cash flow during the time period.
The free cash flow formula is here:
\text{Free CFPS} = \frac{\text{Cash flow - Capital expenditures}}{\text{Average outstanding shares}}
Or
\text{Free cash flow} = \frac{\text{Free cash flow}}{\text{Average outstanding shares}}
Example of Cash Flow Per Share
To calculate cash flow per share, we need some figures from the cash flow statement or income statement.
Here’s an example of a hypothetical company ABC.
CFPS for 2018:
- Operating cash flow: 100
- Preferred dividend: 40
- Average outstanding shares: 8 + 2(6รท12) = 9
According to the formula,
\text{CFPS} = \frac{100 - 40}{9} = 6.67
CFPS for 2019:
- Operating cash flow: 140
- Preferred dividend: 18
- Average outstanding shares: 10
According to the formula,
\text{CFPS} = \frac{140 - 18}{9} = 12.2
Cash Flow Per Share vs Earnings Per Share
Earnings per share is another financial ratio to measure the company’s performance. It’s calculated by subtracting the company’s net income by its outstanding shares.
Earnings per share formula:
\text{Earnings per share} = \frac{\text{Net income}}{\text{Outstanding shares}}
However, earnings per share ratio can be easily manipulated by accounting methods, which is why investors prefer cash flow per share because cash is not artificially inflated.
Conclusion
Overall, cash flow per share indicates the liquidity and profitability of the company. It is used by investors, shareholders, and even creditors.
However, only focusing on a single ratio can’t provide you with the actual position of the company. That’s why you should analyse every important cash flow ratio.
Here, I suggest you read my article on the 7 best cash flow ratios. It will definitely increase your knowledge significantly.