What it means
Earnings per share is the most quoted measure of a company's performance, but earnings are shaped by accounting decisions: how fast assets are depreciated, when revenue is recognised, what provisions are made. Cash flow per share sets those aside and asks how much cash the operations actually produced for each share.
When the two measures diverge sharply, one of them is telling a story the other is not. Earnings well above cash flow may mean profit is being booked before it is collected, or that non-cash gains are inflating it.
Cash flow well above earnings usually means large depreciation charges, common in capital-intensive industries, or growing deferred revenue, common in subscription businesses. The usual numerator is operating cash flow from the cash flow statement, before capital expenditure.
Some analysts add back changes in working capital to get a smoother figure; others deduct capital expenditure to arrive at free cash flow per share, which is stricter and more relevant for businesses that must keep investing to stand still. The denominator is normally the weighted average diluted share count, the same one used for diluted earnings per share, so that the two figures are comparable.
Cash flow per share feeds directly into the price-to-cash flow ratio, and it is useful for judging dividend sustainability: a company paying a dividend per share above its free cash flow per share is funding the dividend from borrowing or reserves, which cannot last. It is also harder to manipulate than earnings, though not impossible: delaying supplier payments or accelerating customer collections around the period end can flatter a single year's operating cash flow.
The figure is only meaningful in comparison: with the same company's earnings per share, with its own history, with its dividend, and with peers in the same industry. On its own, $3.50 of cash flow per share says nothing until it is set against a share price and a trend.
In practice
Real-world examples.
Example
A software company reports earnings per share of $2.00 and cash flow per share of $3.40 because customers pay annual subscriptions in advance; investors regard the cash figure as the better guide to its value.
Example
A construction firm reports earnings per share of $1.50 and cash flow per share of $0.20 because it recognised profit on contracts whose clients have not yet paid; analysts flag the gap as a warning.
Example
A utility with cash flow per share of $6 and free cash flow per share of $1 shows how much of its cash goes into maintaining its network before anything reaches shareholders.
Think of it
“Cash flow per share shows how much actual cash each share of stock generates-often more reliable than earnings.
Formula
Calculation
Cash Flow Per Share = Operating Cash Flow / Weighted Average Shares Outstanding
Free Cash Flow Per Share = (Operating Cash Flow minus Capital Expenditure) / Weighted Average Shares Outstanding
Worked example. A telecommunications company reports for the year:
- Net profit: $360 million
- Depreciation and amortization: $520 million
- Increase in working capital: $40 million (cash absorbed)
- Operating cash flow: $360 million + $520 million minus $40 million = $840 million
- Capital expenditure: $480 million
- Weighted average diluted shares: 400 million
- Dividend paid: $1.20 per share
- Share price: $28
Earnings per share = $360 million / 400 million = $0.90
Cash flow per share = $840 million / 400 million = $2.10
Free cash flow per share = ($840 million minus $480 million) / 400 million = $0.90
Price-to-earnings = $28 / $0.90 = 31; price-to-cash flow = $28 / $2.10 = 13.3; price-to-free cash flow = $28 / $0.90 = 31.
The company's cash flow per share is more than double its earnings per share because of heavy depreciation, which makes the shares look cheap on price-to-cash flow. But capital expenditure consumes most of that cash, so free cash flow per share equals earnings per share. The $1.20 dividend exceeds free cash flow per share of $0.90; the company is paying out more than it generates after investment, and the gap of $120 million a year is being borrowed.Case study
Seen in the real world.
An income fund manager screened for high dividend yields and found a shipping company paying $2.00 a share, a 9% yield, with earnings per share of $2.40 that appeared to cover the dividend comfortably. Before buying, an analyst on her team calculated cash flow per share. Operating cash flow per share was $4.50, well above earnings because of large depreciation on the fleet, which looked reassuring.
But the fleet was ageing, and capital expenditure to replace vessels ran at $4.00 per share, leaving free cash flow per share of $0.50 against a $2.00 dividend. The company had been paying its dividend by adding debt for three years. The manager passed on the shares.
Within a year the company cut the dividend by 75% to fund vessel replacements, and the share price fell 40%. The team's screening rule now requires free cash flow per share to cover the dividend at least 1.2 times over a three-year average.
Watch out
Common mistakes.
- Using operating cash flow per share without looking at capital expenditure. For asset-heavy businesses, free cash flow per share is the figure that matters.
- Comparing cash flow per share across companies with different share counts as if the number itself meant something. Compare ratios and trends, not absolute figures.
- Reading a single year. Working capital swings can move operating cash flow substantially from one year to the next.
Questions
People also ask.
What is the difference between cash flow per share and earnings per share?
Earnings per share is accounting profit per share, after non-cash charges. Cash flow per share is operating cash generated per share, before those charges.
Is a higher cash flow per share always better?
Higher than earnings per share often reflects depreciation or prepayments, which is normal. What matters is whether the cash is enough to fund investment and dividends and whether the trend is rising.
Which share count should be used?
The weighted average diluted count, so that the figure is comparable with diluted earnings per share.
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