What Is Cash Flow Per Share and How Is It Calculated?

Cash flow per share is a key metric for investors and analysts, offering insights into a company’s financial health beyond traditional earnings metrics. Unlike net income, which can be influenced by accounting choices, cash flow per share provides a clearer picture of the actual cash generated by a business. This makes it a valuable tool for assessing a company’s ability to generate cash and sustain operations.

Understanding how to calculate this metric allows stakeholders to make informed decisions about investments or strategic directions.

Calculation Steps

To determine cash flow per share, follow these steps to ensure the resulting figure accurately reflects the cash available to shareholders.

Identifying Operating Cash Flow

Start by identifying the operating cash flow (OCF) from the company’s financial statements. This figure, found in the cash flow statement, represents the cash generated by the company’s core operations. OCF excludes cash flows from investing and financing activities, focusing solely on primary business activities. According to Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), OCF can be calculated using either the direct or indirect method. The indirect method, more commonly used, starts with net income and adjusts for non-cash expenses, changes in working capital, and other non-operating gains or losses.

Accounting for Non-Cash Items

Once the operating cash flow is identified, adjust for non-cash items like depreciation, amortization, and stock-based compensation. These expenses impact net income but do not directly affect cash flow, so adding them back provides a clearer view of actual cash generation. Changes in working capital, reflecting fluctuations in current assets and liabilities, should also be considered, as they indicate cash consumed or generated by operations. These adjustments ensure the metric accurately represents cash flow rather than being influenced by accounting practices.

Dividing by Weighted Average Shares

Divide the adjusted operating cash flow by the weighted average number of shares outstanding during the period. This figure, reported in the company’s earnings release or annual report, accounts for changes in share count due to stock issuances, buybacks, or other corporate actions. Using the weighted average method ensures the calculation reflects shareholder dilution or concentration over the reporting period, resulting in a reliable measure of cash flow per share.

Distinguishing from Earnings per Share

Cash flow per share and earnings per share (EPS) are distinct financial metrics, each providing different insights into a company’s performance. EPS measures profitability by dividing net income by the number of outstanding shares, reflecting the earnings attributable to each share. However, EPS is influenced by accounting policies and non-cash expenses, which can distort its depiction of financial health.

In contrast, cash flow per share focuses on liquidity, showing the cash a company generates. This makes it valuable for evaluating a company’s ability to fund operations, pay dividends, and pursue growth without relying on external financing. During economic downturns, strong cash flow per share can reassure investors and creditors, showcasing a company’s resilience and operational efficiency.

This metric is especially useful for companies with significant non-cash expenses. For instance, technology firms often report high depreciation and amortization due to investments in intangible assets. While these expenses reduce net income and EPS, they do not impact cash flow per share, highlighting the company’s cash generation capabilities.

Typical Data Sources for Calculation

Accurate calculation of cash flow per share relies on several financial data sources. The cash flow statement is the primary source, detailing cash inflows and outflows. This document, required by both the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), provides essential data on operating cash flows.

Additional information can be drawn from the income statement and balance sheet. These documents offer context on revenues, expenses, and changes in equity, which can influence cash flow. Analysts may review the balance sheet for details on current assets and liabilities, as these affect working capital adjustments.

Regulatory filings, such as the SEC’s Form 10-K in the United States, provide comprehensive financial disclosures, including management’s discussion and analysis (MD&A), which sheds light on factors influencing cash flow. External sources like industry reports and market analyses can also provide context on economic conditions, competitive pressures, and regulatory changes, complementing the internal data from financial statements.