Free cash flow per share definition
/What is Free Cash Flow per Share?
Free cash flow per share measures the amount of cash spun off by a business. A significant amount of free cash flow per share, and especially when it is trending up, indicates that a business has sufficient cash to pay down debt, acquire assets, pay dividends, and so forth.
How to Calculate Free Cash Flow per Share
The calculation of free cash flow per share is total free cash flow, divided by the weighted average number of shares outstanding during the measurement period. The formula is as follows:
Free cash flow ÷ Weighted average number of shares outstanding = Free cash flow per share
Advantages of Free Cash Flow per Share
There are a number of advantages associated with the free cash flow per share measurement. They include the following:
Focuses on cash generation. Unlike earnings per share, which can be influenced by non-cash items (e.g., depreciation, amortization), free cash flow per share highlights the actual cash generated by the business. This is crucial for assessing a company’s ability to fund operations, pay dividends, or reinvest in growth.
Good dividend indicator. For income-focused investors, free cash flow per share is a more reliable metric than net income for evaluating a company’s ability to pay and maintain dividends.
Less subject to manipulation. While accounting practices can sometimes distort net income, cash flow metrics are less subject to manipulation, providing a clearer picture of financial performance.
Shows financial flexibility. A high level of free cash flow per share reflects strong financial flexibility, suggesting the company can pursue strategic opportunities such as acquisitions, stock buybacks, or debt repayment.
Reveals financial sustainability. Free cash flow per share reveals the cash available to the company after capital expenditures. A consistently positive free cash flow per share indicates that a company can sustain its operations without relying excessively on external financing.
Useful for valuing a business. Investors use free cash flow per share in valuation models (like discounted cash flow analysis) to estimate intrinsic value, which offers a more cash-oriented view of a company's worth.
Early warning signal. A declining free cash flow per share figure can act as an early warning sign of potential financial trouble, even if earnings metrics appear healthy, enabling proactive decision-making.
By focusing on actual cash generation and providing insight into a company’s operational and strategic potential, free cash flow per share can be a robust tool for both investors and management.