What Is Free Cash Flow Per Share?

Free cash flow per share is a financial metric that provides insight into a company’s ability to generate cash after accounting for its operational needs and investments in its business. This measure helps investors understand a company’s true cash-generating power, looking beyond reported profits influenced by accounting conventions. It offers a clearer picture of financial health and capacity to fund future growth, reduce debt, or return capital to shareholders.

Defining Free Cash Flow Per Share

Free cash flow (FCF) represents the cash a company generates from its operations after deducting capital expenditures required to maintain or expand its asset base. Capital expenditures include investments in property, plant, and equipment, which are necessary for a business to continue its operations or pursue growth. This is the cash left over for the company to use as it deems fit.

The “per share” component divides total free cash flow by the number of outstanding common shares. This converts the company’s overall cash generation into a per-share value, making it comparable to other per-share metrics like earnings per share. It illustrates the amount of discretionary cash available for each share of stock.

Free cash flow per share indicates the cash available to common shareholders, debt holders, or for strategic reinvestment after all essential operations and asset maintenance have been funded. It is a robust indicator because it reflects the actual cash generated by the business, which is less susceptible to accounting estimates and non-cash charges, making it a more tangible measure of financial performance than profitability alone.

Calculating Free Cash Flow Per Share

The calculation for free cash flow per share begins with a company’s operating cash flow, found on its cash flow statement. Capital expenditures are subtracted from this amount, yielding the company’s free cash flow. This free cash flow is then divided by the total number of diluted shares outstanding to arrive at the per-share figure.

The formula is: Free Cash Flow Per Share = (Operating Cash Flow – Capital Expenditures) / Diluted Shares Outstanding. Operating cash flow includes cash generated from normal business activities before non-cash expenses like depreciation and amortization. Capital expenditures, or CapEx, are funds used to acquire, upgrade, and maintain physical assets.

For example, if a company reports an operating cash flow of $500 million and capital expenditures of $150 million, its free cash flow is $350 million. If the company has 100 million diluted shares outstanding, its free cash flow per share would be $3.50 ($350 million / 100 million shares).

Interpreting Free Cash Flow Per Share

A consistently high and positive free cash flow per share indicates a financially strong company with ample cash reserves. Such a company has the flexibility to pay dividends to shareholders, reduce debt obligations, repurchase its own shares, or fund new growth initiatives without relying on external financing. This suggests the business model effectively turns sales into tangible cash.

Conversely, a low or negative free cash flow per share can signal different scenarios depending on the company’s stage of development. For an established company, it might suggest financial strain, inefficient operations, or heavy reliance on borrowing. This could mean the company struggles to generate enough cash from its core business to cover operational and investment needs.

For a rapidly growing company, negative free cash flow per share might be acceptable if it results from significant strategic capital investments aimed at future expansion. These investments must be carefully scrutinized to ensure they yield substantial returns over time. Analysts often prefer free cash flow per share over net income or earnings per share because it reflects actual cash generation. The cash flow statement, where FCF components are found, is less subject to accrual accounting adjustments and estimates, providing a more transparent view of a company’s liquidity and solvency.