Cash Flow Per Share

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.read more 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. read more. A weighted average number is generally used because the number of common outstanding shares can fluctuate over the given period.

Cash Flow Per Share = (operating cash Flow – Preferred Dividends) / Weighted Average Number of Shares
Cash Flow Per Share

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For eg:
Source: Cash Flow Per Share (wallstreetmojo.com)

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.read more 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.read more and do not involve in actual cash flows from operationsCash Flows From OperationsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital.read more by any outflow.

Cash Flow per Share = (EBIT * (1 – tax rate) + Depreciation) / Common Shares Outstanding

Examples

Example #1

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:-Financial Statements Of The Company:-Financial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more

cfps example 1.1

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

=10*12/12=10 Lakh

Therefore, the Calculation of CFPS for 2019 is-

CFPS Example 1.2

Similarly, we have done the calculation of CFPS for 2018

CFPS Example 1.3

Example #2

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. read more are not available but are available from the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more as given below:-

CFPS Example 2.1

Solution: 

Calculate CFPS for 2019 using below formula

Cash Flow per Share Example 2.2
  • Cash Flow per Share Formula = (EBIT * (1 – tax rate) + Depreciation) / Common Shares Outstanding
  • =(120*(1-36%)+40)/10
  • =11.68

Similarly, we have done the calculation of CFPS for 2018

Cash Flow per Share Example 2.3
  • = (100*(1-30%)+20)/9
  • =10

Why is Cash Flow Per Share Better than EPS?

EPS or Earnings per ShareEPS Or Earnings Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more 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 practicesAccounting PracticesAccounting practice is a set of procedures and controls used by an entity's accounting department to keep track of accounting records and entries. Other reports are generated based on accounting records, such as financial statements, cash flow statements, fund flow statements, payroll, tax workings, payment and receipts statements, and so on, and they form the basis of the auditor's reliance while auditing the financial statements.read more.

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:-

Cash Flow per Share Example 3.1

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.read more 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

= 0.1

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.

Conclusion

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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 –