What it means
Earnings per share tells you how much accounting profit sits behind each share, but profit includes non-cash items such as depreciation (the annual write-down of an asset's cost) and accounting estimates. Cash flow per share strips those out by starting from operating cash flow instead, giving a figure that reflects what actually landed in the bank.
For capital-intensive businesses the two numbers can be very far apart. The ratio matters most when comparing companies with different accounting choices.
Two firms with identical operations can report different earnings simply because one depreciates its assets faster, yet their cash flow per share will be close to identical. Investors who want to compare like with like often reach for the cash version first.
The calculation is operating cash flow divided by the weighted average number of ordinary shares outstanding during the period. Weighted average matters because shares issued halfway through the year should only count for half the year, otherwise a company can appear to dilute its cash generation more than it really has.
Analysts frequently pair the ratio with the share price to produce a price to cash flow multiple, which works in much the same way as a price to earnings multiple. A lower multiple suggests you are paying less for each dollar of cash the business produces, though a low multiple can also signal that the market expects that cash to shrink.
One important nuance is which cash flow figure goes on top. Some analysts use operating cash flow, others deduct capital expenditure to use free cash flow, and the two can differ enormously for a business that must constantly replace equipment.
Always check the definition before comparing one published figure with another.
In practice
Real-world examples.
Example
An investor comparing two regional bus operators finds near identical earnings per share but cash flow per share of $3.20 at one and $1.90 at the other. Digging in, the weaker firm is capitalising repair costs that its rival expenses, which flatters profit but not cash.
Example
A board sets a long-term incentive plan on growth in cash flow per share rather than earnings per share, so that executives cannot hit targets through accounting estimates alone. The remuneration committee also caps the effect of share buybacks on the measure.
Example
A mid-sized brewer with heavy plant investment reports cash flow per share of $5.40 against earnings per share of $1.80. Its lender uses the cash figure when assessing how comfortably interest can be covered.
Think of it
“Cash flow per share is how much cash the business generates for each share of stock.
Formula
Calculation
Cash flow per share = operating cash flow / weighted average shares outstanding.
A logistics group reports operating cash flow of $48,000,000 for the year and has a weighted average of 12,000,000 ordinary shares in issue. Cash flow per share is $48,000,000 / 12,000,000 = $4.00. The same company reports net profit of $30,000,000, which after adding back $18,000,000 of depreciation gives the $48,000,000 of operating cash, so earnings per share is only $30,000,000 / 12,000,000 = $2.50. With the shares trading at $60, the price to cash flow multiple is $60 / $4.00 = 15 times, materially cheaper looking than the price to earnings multiple of $60 / $2.50 = 24 times.Case study
Seen in the real world.
The following is an illustrative, fictional scenario. Copperfield Cold Storage, an invented warehousing group, listed with 20,000,000 shares and told investors to watch cash flow per share rather than earnings, because its refrigeration assets carried very heavy depreciation charges.
In its first full year the company reported operating cash flow of $70,000,000, giving cash flow per share of $3.50, while accounting earnings per share came in at just $0.90. Several commentators called the business barely profitable, but lenders and long-term holders focused on the $3.50 and were comfortable.
The illustrative lesson was not that cash flow per share is the better measure in all cases. It was that a business with old, heavily depreciated assets and rising replacement costs needs both numbers, because sooner or later the cash must be spent on new plant.
Watch out
Common mistakes.
- Using the simple year-end share count instead of the weighted average, which distorts the ratio whenever shares were issued or bought back mid-year.
- Treating cash flow per share as money available for dividends, when much of it is normally required to replace equipment and fund working capital.
- Comparing one company's operating cash flow per share with another's free cash flow per share without noticing that the two use different numerators.
Questions
People also ask.
Is cash flow per share better than earnings per share?
Neither is better, they answer different questions, and cash flow per share is simply harder to influence with accounting judgement.
Why is cash flow per share almost always higher than earnings per share?
Because operating cash flow adds back depreciation and other non-cash charges that reduce reported profit.
Do listed companies have to publish this ratio?
No, it is not a required disclosure in most reporting frameworks, so analysts usually calculate it from the cash flow statement themselves.
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