Cash flow per share definition
/What is Cash Flow per Share?
Cash flow per share is the amount of a firm’s net cash flows allocated to each share outstanding. Cash flow per share is closely followed by investors, because it is difficult for a company to alter the amount of its cash flows. This makes cash flow per share a more transparent measure of a company’s results than earnings per share, which is subject to some obfuscation under the accounting standards.
How to Calculate the Cash Flow per Share
The cash flow per share is calculated as net cash flows divided by the average number of shares outstanding. The average number of shares outstanding can be a complicated calculation, if there have been a number of share issuances or repurchases during the measurement period. The ratio is calculated as follows:
Net cash flows ÷ Average number of shares outstanding = Cash flow per share
The measure is best tracked on a trend line over multiple years, in order to discern any long-term changes in cash flow levels.
Cash flow information is available on a company’s statement of cash flows. If a business does not provide cash flow information, then it can be approximated by adding non-cash expenses (such as depreciation and amortization) back to the reported net income, plus any net changes in capital investments during the reporting period. Adding back non-cash expenses keeps the net income figure from being artificially deflated.
Related AccountingTools Courses
The Interpretation of Financial Statements
Example of Cash Flow per Share
A business generates $1,000,000 of net cash flow in its most recent year of operations. During that time, it averaged having 500,000 shares outstanding. This results in the following calculation:
$1,000,000 Net cash flows / 500,000 Average shares outstanding
= $2.00 Cash flow per share
Advantages of Using Cash Flow per Share
There are several advantages associated with using the cash flow per share measurement, which are as follows:
Good indicator of financial condition. It is difficult for an organization’s accountants to manipulate the cash flow per share figure, so this is a good metric for determining the cash-generating capability of a business.
Good view of liquidity. The cash flow per share measure provides a reasonable, aggregated measure of the liquidity of a business, though a detailed examination of its statement of cash flows will provide more information. Thus, it is useful for judging whether a business can pay down its debts and/or fund an expansion of its operations.
Difficult to manipulate. It is not easy to manipulate reported cash flows, as opposed to the earnings per share metric. This means that the odds of being misled by adverse accounting tactics are lower than would be the case with earnings per share.
Good valuation tool. Cash flow is one of the best ways to derive a valuation for a business, so the cash flow per share figure can be incorporated into a valuation model. It should be used with caution, however, since it is historical in nature; it should not be used to predict future cash flows.