Cash flow per share

Definition

Cash flow per share is a financial metric that measures the cash generated by a company on a per-share basis, providing insights into the company’s ability to generate cash for its shareholders. This metric is useful for investors as it offers a clearer picture of a company's performance compared to earnings, which can be influenced by accounting practices. Understanding cash flow per share helps assess the sustainability of dividends and the overall health of a company's operating activities.

5 Must Know Facts For Your Next Test

1. Cash flow per share is calculated by dividing total cash flow from operations by the number of shares outstanding, providing an easy way for investors to gauge cash generation relative to their ownership stake.
2. A higher cash flow per share often indicates better liquidity and financial health, signaling to investors that the company can cover its obligations and potentially increase dividends.
3. Unlike earnings per share, which can be manipulated through accounting practices, cash flow per share reflects actual cash movements, making it a more reliable measure of a company's financial performance.
4. Companies with strong operating activities usually show positive trends in cash flow per share, indicating effective management and operational efficiency.
5. Investors often use cash flow per share alongside other metrics like free cash flow and dividend payout ratios to make informed investment decisions about a company's ability to return value to shareholders.

Review Questions

• How does cash flow per share provide a clearer picture of a company's financial health compared to traditional earnings metrics?
  • Cash flow per share focuses on actual cash generated by the company rather than accounting profits, which can be affected by various accounting methods and non-cash items. This metric helps investors understand the company's liquidity and its ability to meet obligations and fund operations. Since it directly reflects the cash available to shareholders, it offers a more transparent view of financial health than traditional earnings metrics.
• Discuss how operating activities influence the calculation of cash flow per share and why this relationship is important for investors.
  • Operating activities are the core functions of a business that generate revenue, directly affecting the calculation of cash flow from operations. A strong performance in operating activities typically leads to higher cash flow, which translates into better cash flow per share figures. Investors value this relationship because it indicates how well the company manages its day-to-day operations and whether it can sustain growth and support dividends over time.
• Evaluate the implications of low cash flow per share on a company's dividend policy and overall investment attractiveness.
  • Low cash flow per share can signal potential issues with a company's liquidity and operational efficiency, raising concerns about its ability to sustain or increase dividend payouts. This situation may lead investors to question the company's long-term viability and attractiveness as an investment. If a company cannot generate sufficient cash to support its dividends or reinvest in growth opportunities, it may struggle to maintain investor interest, leading to lower stock prices and potential financial instability.

Related terms

Operating cash flow: The cash generated from a company's normal business operations, which is critical in determining cash flow per share.

Earnings per share (EPS): A financial measure that indicates how much profit a company makes for each share outstanding, often compared with cash flow per share to gauge performance.

Dividend payout ratio: The percentage of earnings distributed to shareholders as dividends, which can be assessed in relation to cash flow per share to evaluate dividend sustainability.