What is Cash Flow Per Share (CFPS)?
Cash Flow per Share of the company shows the cash flow portion of the company which is allocated against each of the common stock presents in the company and it is calculated by dividing the cash flow which is earned by the company during an accounting period by total outstanding common stock.
How to Calculate Cash Flow Per Share?
Cash flow per share can be calculated as a ratio that divides the cash flows generated under normal business operations after adjusting for preferred dividends during a reporting period (yearly, semi-annually, or quarterly) by the total number of shares outstandingShares OutstandingOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet. or the weighted average number of sharesWeighted Average Number Of SharesWeighted Average Shares Outstanding is a calculation used to estimate the variations in a Company’s outstanding shares during a given period. It is determined by multiplying the outstanding number of shares (consider issuance & buybacks) in a given reporting period with their individual time-weighted portions. . A weighted average number is generally used because the number of common outstanding shares can fluctuate over the given period.
It can also be calculated using net income or EBIT (earnings before interest and taxes)EBIT (earnings Before Interest And Taxes)Earnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital. by adding back the cost of depreciation and amortization to EBIT, which are non-cash transactionsNon-cash TransactionsNon-cash expenses are those expenses recorded in the firm's income statement for the period under consideration; such costs are not paid or dealt with in cash by the firm. It involves expenses such as depreciation. and do not involve in actual cash flows from operations by any outflow.
Mr. Unknown of Ethical analytics has to calculate the Cash Flow Per Share (CFPS) of Hypothetical Pvt. Ltd using the following data extracted from the financial statements of the company:-
Calculation of Weighted Average Number of Shares
For 2018 8-lakh shares for a full year and 2-lakh shares for a half-year
=8+2*6/12 =9 Lakh
For 2019 10-lakh shares for the full year
Therefore, the Calculation of CFPS for 2019 is-
Similarly, we have done the calculation of CFPS for 2018
Ethical analytics again tasked Mr. Unknown to calculate the Cash Flow Per Share (CFPS) of another company XYZ Pvt. Ltd. But this time, data from cash flows statementsCash Flows StatementsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. are not available but are available from the income statement as given below:-
Calculate CFPS for 2019 using below formula
- Cash Flow per Share Formula = (EBIT * (1 – tax rate) + Depreciation) / Common Shares Outstanding
Similarly, we have done the calculation of CFPS for 2018
- = (100*(1-30%)+20)/9
Why is Cash Flow Per Share Better than EPS?
EPS or Earnings per Share is the most popular profitability metric used by investors and analysts to measure the number of profits allocated to its equity (common) shareholders. It is calculated by dividing the company’s net income or EAES (earnings available to equity shareholders) by the weighted average number of shares outstanding.
EBIT or net income is calculated after the company generates revenues (sales). Many times sales are made on credit, i.e., zero cash inflow, but it increases the earnings of the company. Also, EBIT is calculated after deducting the cost of depreciation and amortization (non-cash expenses), and further net income will be calculated after subtracting various non-recurring and irregular expenses.
All these factors can deflate the value of net income artificially. Also, EPS can be easily manipulated through liberal accounting practices.
This example will try to justify the popular quote about cash flows: “Cash is the King.”
Kingsman Pvt. Ltd has an innovative product with low production costs and expected high demands. With high enthusiasm, they invest heavily in setting up a production line, building warehouses, and market their product. The company issued 100,000 equity shares at the rate of 10 per share to meet all of its expenses.
The demand was high as expected, but the new players generated most of their sales on credit. And due to the low cost of depreciation, the profit (net income) figure appears huge in the beginning. But later, the company starts lacking the availability of cash in hands. The company now has to lower its production capacity, cut its costs, or has to apply for some loan, which further has costs.
The company’s income statement for the first quarter is as follows:-
EPS = Net Profit / Number of shares outstanding = 490 / 100 = 4.9
The Net Profit values are huge, and the EPS ratio is quite good but then also a crisis for cash arrives at the company.
The management of the company must have checked the cash flow statementsCash Flow StatementsStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities. and calculated a more reliable profitability ratio of CFPS.
Operating Cash Flow = Operating Cash Inflow – Operating Cash Outflow
= 500 – (280+210) = 10
So the calculation of CFPS is as follows,
Cash flow per share formula = Operating Cash Flow / No. of shares outstanding
= 10 / 100
The Kingsman, if tracked its cash flows earlier, would have known its poor cash collection performance and would have avoided the situation of crisis. High EPS just indicates the expected earnings the shareholders may get in the form of dividend for every share they held. CFPS shows the actual cash flow carried by the Kingsman during the quarter.
- EPS is an important profitability metric, but CFPS should never be overlooked.
- Earnings can be manipulated, but cash flows present the true picture. Hence in finance and accounting, it is said that “Cash is the King.”
- Every company, to a certain extent, manipulates some numbers to increase or decrease their profit values. E.g., services to be provided over the next three years, the company recorded a lump-sum amount of all three years as revenue in the current year itself and inflated the overall value. a company should have distributed the revenue in all three years or record as and when received
- Companies show assets worth billions in their books but did not exist ever and charge heavy depreciation to lower their profit figures to pay fewer taxes. Classic examples are companies like Enron, Worldcom, Adelphia. Their Balance sheet looks extremely impressive and justifies the low-profit figures due to high depreciation costs. Such extreme manipulation enters the category of fraud.
- Investors must also study cash flow statements and calculate financial ratiosCalculate Financial RatiosFinancial ratios are indications of a company's financial performance. There are several forms of financial ratios that indicate the company's results, financial risks, and operational efficiency, such as the liquidity ratio, asset turnover ratio, operating profitability ratios, business risk ratios, financial risk ratio, stability ratios, and so on. like CFPS other than EPS or P/E ratioP/E RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. .
This article has been a guide to Cash Flow Per Share and its definition. Here we discuss how to calculate Cash Flow Per Share along with practical examples. We also discuss the difference between CFPS vs. EPS. You can learn more about accounting from the following articles –