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The financial performance of an enterprise may be measured by looking at what is known as cash earnings per share. This calculates the cash the enterprise generates from its operations during an accounting period, or operating cash flow. To obtain cash earnings per share, operating cash flow is divided by the number of shares in the company. This measure normally would use the fully diluted shares, or the number of shares that could be held if instruments such as options and warrants are converted into shares by those holding them. Cash earnings per share is different from basic earnings per share, because the former uses cash flow as a measure rather than profit.
To arrive at the figure for cash arising from business operations, it is necessary to include non-cash items in profit. Primary non-cash items are likely to be depreciation of fixed assets, amortization of leases or goodwill and deductions for the impairment of assets. Including these items in the operating profit figure provides a net cash earnings figure.
Cash earnings per share is a measure using fully diluted earnings per share. The figure includes the shares held by investors at the time the calculation is made, as well as the total number of shares that would be in the hands of investors if all investors holding warrants or options to buy shares or convert their holding into shares were to exercise this right. The fully diluted earnings per share figure is used because it is a more conservative measure of earnings potentially available to shareholders.
It is useful to know cash earnings per share, because the figure for cash generated in an accounting period is not as dependent on subjective judgments as the profit figure is. The profit for a period may depend on the company’s capital structure, depreciation policy, policy on amortization of intangible assets and decisions on leasing or buying assets. The figure for cash generated is more independent of these judgments and accounting policies. As with all accounting and financial ratios, the cash earnings per share number is most useful when used to compare the performance of an enterprise with its competitors in the same industry, or to compare the performance of one enterprise in two different periods. Investors performing this type of comparison must ensure that they are comparing the same ratio in each company, because different earnings per share measures are computed in different ways.
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