At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
What is Cash Flow Per Share?
Cash flow per share is a measure of a company’s financial strength. Many analysts believe cash flow per share is a better measurement than earnings per share (EPS) because earnings per share can be more easily manipulated. Cash flow per share can be determined by taking the operating cash flow, subtracting the preferred dividends and then dividing by the number of common shares outstanding. This makes cash flow per share a more attractive indicator.
Investors will often consider cash flow return on investment, or CFROI, as an indicator of the value of a company. This calculation consists of cash flow divided by market value of capital employed. It is usually one of several methods used to value a company when determining if its stock is a good buy or not. Discounted cash flow, another valuation method, predicts the present value of future cash flows and discounts them to arrive at a company valuation.
There are several other financial ratios that relate to cash flow, each of which can be used to compare a company’s financial health to that of its competitors. Free cash flow is the amount of money a company has left over after it has made any necessary capital expenditures. It is calculated as net income plus amortization and depreciation, minus changes in working capital, minus capital expenditures. Operating cash flow is revenues minus all operating expenses. Free cash flow for the firm is operating cash flow, less expenses, taxes, changes in net working capital and changes in investments.
If a company has negative cash flow per share, it means that the company is using its venture capital to pay overhead expenses, and the company has not yet generated positive cash flow from its operations. This is known as the burn rate, and is expressed in the amount of money the company is spending over and above what it takes in, per month. Clearly, a company with a significant burn rate cannot remain in business for very long without making some changes.
If a company has excess cash flow per share, beyond what is needed for operations plus a comfortable cushion, it will often pay shareholders a dividend. The dividend is described as the amount each share receives, as in, “ABC Corp. declared a dividend of $0.15 U.S. Dollars (USD) per share.” Dividends are usually offered by established companies, as emerging companies require all the capital they can generate to fund operations and expansion. Dividends are paid on outstanding shares of preferred stock only.
AS FEATURED ON:
AS FEATURED ON:
-
![Cash flow per share is based on the number of common shares outstanding.]()
By: ZoeCash flow per share is based on the number of common shares outstanding. -
![Free cash flow is the amount of money a company has left over after it has made any necessary capital expenditures.]()
By: Nomad_SoulFree cash flow is the amount of money a company has left over after it has made any necessary capital expenditures. -
![If a company has excess cash flow per share, beyond what is needed for operations plus a comfortable cushion, it will often pay shareholders a dividend.]()
By: endostockIf a company has excess cash flow per share, beyond what is needed for operations plus a comfortable cushion, it will often pay shareholders a dividend.
Discussion Comments
I don't know a whole lot about stocks and investing, but it is easy to understand that a negative cash flow per share would not be a good thing.
I can see how a company who is just starting out probably won't have a lot of excess money. Most of the profit they make in the beginning will probably go to cover start up expenses.
Is there a certain amount of time before a company should start to have a positive cash flow? I wonder if they is some kind of cash flow per share formula that would help investors know when it would be a good time to buy the stock?
I have a financial background, and don't know if very many people think about the free cash flow per share of a company before investing in it.
Most people are familiar with dividend paying stocks and understand they will receive a dividend payment every time the company declares a dividend. As long as they keep receiving that dividend payment, they don't pay much attention to what is happening with the company stock.
One of the things I watch for when researching companies is if they stop paying out a dividend. Sometimes this can mean they are having a cash flow problem and may be a good indication they are struggling.
This is just one thing I look at when I am determining if a company is continuing to be a stable, strong company.
@LisaLou - That is a good analogy of comparing your personal budget with the cash flow per share of a company. Sometimes I am confused and overwhelmed with the investment terminology, but that made a lot of sense.
I might not understand all the investment terms, but I know what it means to have positive cash flow. I can also see if you were going to invest your money in a company that had good cash flow, you would feel more confident that they were going to grow as a company.
The few stocks I own all pay dividends, and even though I don't own a lot of shares, it is nice to get a dividend check every once in awhile.
One of the things I look at when I am doing my due diligence before buying a stock is what their cash flow per share is. I want to invest in strong companies that have good revenue and positive cash flow coming in.
If a company has good net cash flow, I feel like they are able to pay their debt, cover their expenses and have leftover cash. It really isn't any different than the way my personal budget works.
I know if I have positive cash flow every month, my bills and expenses are being paid, and I have extra money to live on. I want to invest in companies that have strength and are able to support themselves.
Post your comments