Definition
Cash Flow Per Share is a financial metric that indicates a company’s financial health and profitability. It represents the net cash a firm produces for each share of its outstanding stock within a certain period. Essentially, it’s calculated by dividing the company’s total cash flow by the total number of outstanding shares.
Key Takeaways
- Cash Flow Per Share is a financial ratio that measures the amount of cash a company generates per share, effectively reflecting the firm’s financial viability and profitability.
- It takes into consideration cash earnings per share available after all obligations, debts and expenses have been paid off, emphasising the company’s ability to generate cash.
- While similar to Earnings Per Share (EPS), Cash Flow Per Share offers a more reliable measure since it is harder to manipulate with accounting techniques, unlike net income.
Importance
Cash Flow Per Share (CFPS) is an important financial metric as it provides a clear picture of a company’s profitability and financial health.
It shows how much cash a company generates on a per share basis and serves as a key indicator of a company’s ability to generate cash beyond its expenses.
CFPS is often used by investors and analysts in their analysis to evaluate a company’s investment potential and financial stability.
It can be used to compare the cash-generating efficiency of different companies and also to assess the sustainability of a company’s dividends.
Higher CFPS values typically indicate greater financial strength and investor profitability.
Explanation
Cash Flow Per Share is a critical measure used by investors and analysts to assess the profitability and financial health of a company. It is particularly useful for evaluating the company’s ability to generate cash – which has diverse applications such as paying off debts, reinvesting in the business, covering operating expenses, and distributing dividends to shareholders.
Unlike net income, which may be influenced by non-cash items like depreciation, this financial measure provides a more direct view of the company’s cash-generating capability, thereby serving as a more reliable indicator of financial strength. Additionally, Cash Flow Per Share provides more transparent insight into a company’s performance and financial stability than earnings per share (EPS), particularly when coupled with other financial indicators.
Investors use the measure to compare the per-share cash flow across different companies before making an investment decision, as it helps them evaluate which company is more likely to yield higher returns. Moreover, this metric helps in determining whether a company has enough cash flow to maintain or increase its payouts, which can be critical information for income-focused investors.
Therefore, Cash Flow Per Share is an essential tool in financial analysis to determine a company’s value and profitability.
Examples of Cash Flow Per Share
Amazon Inc.: Amazon, a multinational technology company, consistently reports its earnings, including cash flow per share, in its quarterly and annual reports. In 2020, Amazon reported a free cash flow per share of roughly $Those figures are calculated by dividing the total free cash flow by the number of outstanding shares in the same period.
Microsoft Corporation: Microsoft, one of the world’s leading technology companies, had a cash flow per share of $35 for the fiscal year ending in
This indicates the portion of Microsoft’s total cash flow earned for each share and helps shareholders evaluate how effectively their investment is being used to generate cash flow.Coca-Cola Company: This beverage company reported a negative cash flow per share of $
36 inThis could be attributed to several factors such as increased operational expenses, decreased sales, higher debts, or a combination of these factors. This information would be crucial for investors as it provides insight into the company’s financial health.
FAQs on Cash Flow Per Share
1. What is Cash Flow Per Share?
Cash Flow Per Share (CFPS) is a performance measurement that indicates a company’s financial health. It represents the net cash a company produces, per each issued share. This ratio is utilized by investors and analysts to determine the value of a share of a company and its ability to generate cash flow for its shareholders.
2. How is Cash Flow Per Share calculated?
Cash Flow Per Share is calculated by taking the company’s operating cash flow, subtracting preferred dividends, and dividing by the number of outstanding shares. The formula is CFPS = (Operating Cash Flow – Preferred Dividends) / Number of Shares Outstanding.
3. What does a high Cash Flow Per Share mean?
A high Cash Flow Per Share typically indicates that a company is generating more cash which can be used for reinvestment, debt reduction, distribution to shareholders or saving for future use. Therefore it is generally seen as a positive sign by investors.
4. What does a low Cash Flow Per Share mean?
A low Cash Flow Per Share might indicate that a company is not generating as much cash. This could limit the company’s ability to reinvest in its business, reduce debt, or fund other financial activities. Therefore, a low CFPS might signal potential financial difficulties or poor management of resources.
5. How does Cash Flow Per Share differ from Earnings Per Share (EPS)?
Unlike Earnings Per Share (EPS), which is based on net income, Cash Flow Per Share is based on operating cash flows. While EPS can be manipulated by creative accounting practices, CFPS reflects the true cash flow situation of the company making it a more reliable measure of profitability.
Related Entrepreneurship Terms
- Earnings Per Share (EPS): This term refers to a portion of a company’s profit allocated to each outstanding share of common stock. It’s considered to be an indicator of a company’s profitability.
- Dividend Per Share (DPS): Dividends per share represents the total dividends declared over a period divided by the number of outstanding ordinary shares issued.
- Cash Flow Statement: A financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given period.
- Free Cash Flow (FCF): It’s a measure of a company’s financial flexibility and represents the cash a company can generate after accounting for capital expenditures such as buildings or equipment.
- Net Income: Net income is a company’s total earnings, and it’s calculated by subtracting total expenses from total revenues. It often referred to as the “bottom line” because it sits at the bottom of the income statement.
Sources for More Information
- Investopedia: A comprehensive online resource for finance and investing terms and concepts, including Cash Flow Per Share.
- CFA Institute: A global, professional organization that offers in-depth financial education resources.
- Morningstar: A leading provider of independent investment research, which includes data on various financial terms and concepts.
- Macrotrends: An online platform for long term investors looking for historical trends, charts and data.
