Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Cash Flow per Share

What it is:

Cash flow per share represents the portion of a company's cash flow allocated to each share of common stock.

How it works (Example):

Cash flow per share can be calculated by dividing cash flow earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

The formula for cash flow per share is:

Cash Flow Per Share = (Cash Flow - Preferred Dividends) / Shares Outstanding

Let's assume that during the fourth quarter, Company XYZ reported cash flow of $4 million and distributed preferred dividends of $500,000. During the same time frame, the company had a total of 10 million shares outstanding. We calculate the company's quarterly cash flow per share as follows:

($4,000,000 - $500,000) / 10,000,000 = $0.35

Why it Matters:

Earnings per share (EPS) is a carefully scrutinized metric that is often used as a barometer to gauge a company's profitability per unit of shareholder ownership, but cash flow per share is even more important in some regards. Because of the nature of accounting rules, earnings can be easily manipulated, but cash flow is much harder to manipulate.

As such, even though EPS is a key driver of share prices, many analysts look to cash flow per share as a "check" on the reasonableness of a company's valuation and stock price.
 

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