Cash Flow Per Share

Definition

Cash flow per share is a financial metric that calculates the cash generated by a company's operations on a per-share basis, providing investors with insight into the company's ability to generate cash relative to its outstanding shares. This metric helps in assessing the financial health of a company, as it reflects the cash available to shareholders after accounting for all expenses and reinvestments. It’s crucial for evaluating companies with varying capital structures and can provide a clearer picture of value than earnings per share alone.

5 Must Know Facts For Your Next Test

1. Cash flow per share is calculated by dividing the total cash flow from operations by the number of outstanding shares.
2. This metric is particularly useful for valuing companies in capital-intensive industries, where traditional earnings measures may be misleading.
3. Investors often look for increasing cash flow per share over time as a sign of a company's growing operational efficiency and financial strength.
4. Cash flow per share can help investors identify potential dividend-paying companies, as it indicates how much cash is available for distribution to shareholders.
5. Unlike earnings per share, cash flow per share is less susceptible to accounting manipulation, making it a more reliable measure of financial performance.

Review Questions

• How does cash flow per share provide a different perspective on a company's financial health compared to earnings per share?
  • Cash flow per share focuses on the actual cash generated by a company's operations, which offers a more direct insight into liquidity and the ability to fund dividends or reinvest in the business. In contrast, earnings per share may include non-cash items like depreciation or amortization, which can obscure true profitability. Thus, while EPS provides information about profitability, cash flow per share is crucial for understanding how well a company manages its cash resources.
• Evaluate why cash flow per share might be especially important for investors analyzing companies in capital-intensive industries.
  • In capital-intensive industries, companies often require significant investments in assets to maintain operations and growth. Cash flow per share becomes critical because it reveals how much actual cash is available after covering operating expenses and capital expenditures. This information helps investors assess whether a company can sustain its operations, fund future growth initiatives, or return capital to shareholders without relying heavily on debt financing.
• Assess how trends in cash flow per share can influence investment decisions and valuations of companies over time.
  • Trends in cash flow per share are vital indicators for investors looking to evaluate long-term financial performance and sustainability. An upward trend in this metric suggests improving operational efficiency and greater cash generation capabilities, which can lead to higher valuations as investors may be willing to pay more for shares with consistent cash generation. Conversely, declining cash flow per share can signal potential liquidity issues or operational challenges, prompting investors to reconsider their investment strategies or reevaluate their positions in such companies.

Related terms

Operating Cash Flow:

The cash generated from a company's regular business operations, indicating the efficiency of its core business activities.

Earnings Per Share (EPS):

A financial measure that represents the portion of a company's profit allocated to each outstanding share of common stock.

Free Cash Flow:

The cash that a company generates after accounting for capital expenditures, which can be used for expansion, dividends, or reducing debt.