What it means
Earnings per share divides profit by the number of shares, but profit can be shaped by accounting choices. Cash flow per share does the same with cash.
It takes operating cash flow, deducts any preferred dividends, and divides by the weighted average number of shares outstanding. Because it focuses on cash, many investors consider it harder to manipulate.
A company with high depreciation may report modest earnings per share but strong cash flow per share. The measure also avoids some distortions from non-cash items such as impairments.
Investors often use it to value a company. The price-to-cash-flow ratio divides the share price by cash flow per share, giving a multiple that can be compared with peers.
A lower multiple may suggest a bargain, although it can also reflect higher risk. Several cautions apply.
Cash flow per share does not subtract capital spending, so a business that must reinvest heavily may look better than it really is. Different providers define cash flow in different ways, with some using net income plus depreciation, so the formula should be checked.
Share counts matter too. If a company issues new shares, the figure falls even if total cash flow rises.
Conversely, buybacks reduce the number of shares and can lift the figure without any change in the business itself. Companies sometimes report a similar figure in their own presentations, often described as operating cash flow per share.
These versions can differ in what they add back, so it helps to read the footnotes. When comparing two companies, use the same definition for both rather than relying on published figures from different sources.
In practice
Real-world examples
Example 1
An investor compares two retailers. Company A has cash flow per share of $3.00 and a share price of $30, while Company B has $2.00 and a price of $30. Company A looks cheaper on a price-to-cash-flow basis, at 10 compared with 15. The investor then checks debt levels before deciding which company to buy, since debt can change the picture.
Example 2
A heavy equipment maker reports earnings per share of $1.20 but cash flow per share of $3.10 because it has large depreciation charges. An analyst concludes that earnings understate the cash the business produces. She then checks capital spending needs before reaching a view.
Example 3
A technology firm buys back 10% of its shares. Total operating cash flow stays at $50,000,000, but the share count falls from 100,000,000 to 90,000,000. Cash flow per share rises from $0.50 to about $0.56. Analysts note that the improvement is purely a result of the smaller share count, and not of better trading.
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 - Preferred dividends) / Weighted average shares outstanding
Worked example: a company has operating cash flow of $12,000,000, pays $2,000,000 in preferred dividends and has 5,000,000 weighted average shares.
Step 1: Deduct preferred dividends: $12,000,000 - $2,000,000 = $10,000,000.
Step 2: Divide by shares: $10,000,000 / 5,000,000 = $2.00.
Cash flow per share is $2.00. If the share price is $20, the price-to-cash-flow ratio is $20 / $2.00 = 10.Case study
Seen in the real world
Quarry Hill Mining is an illustrative, fictional company with 20,000,000 shares and operating cash flow of $60,000,000. It has no preferred shares. Its cash flow per share was therefore $3.00, compared with earnings per share of $1.10.
An investor asked why the two measures differed so much. The chief financial officer explained that depreciation on its mines was large and non-cash, so the profit figure understated the cash the company produced. She also warned that mining needs heavy replacement spending, and capital expenditure took about $40,000,000 each year.
The illustrative lesson is that cash flow per share is a useful first look, but it should be checked against capital spending. Free cash flow per share, at $1.00, gave a more sober view. The investor decided that the shares were fairly priced only after looking at both measures together.
Watch out
Common mistakes
- Assuming cash flow per share is the amount the company will pay out to each shareholder.
- Ignoring capital spending, which can make a heavy investor look more attractive than it is.
- Comparing figures from data providers that define cash flow differently.
Questions
People also ask
Is cash flow per share better than earnings per share?
Neither is better in every case, and the two work best together, since cash flow shows liquidity and earnings show accounting profit. Analysts often quote both figures in the same report for that reason.
What is the price-to-cash-flow ratio?
It divides the share price by cash flow per share and shows how much investors pay for each dollar of cash flow.
Does it include preferred dividends?
The standard version deducts preferred dividends, because that cash belongs to preferred holders.
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