Cash flow per share (CFPS) is a crucial financial metric that helps investors evaluate a company’s ability to generate cash from its operations. This article will outline cash flow per share, its calculation, and its significance for investors. Covering methods to boost cash flow per share and citing industries using this metric as examples will be part of our discussion.
What is Cash Flow Per Share?
Cash flow per share gauges the cash generated per share from a company’s operations. Calculate this metric by dividing the company’s operating cash flow by its total number of shares outstanding.
The operating cash flow reflects the cash generated or utilized in a company’s day-to-day operations, encompassing sales, expenses, and taxes. It does not include cash generated or used by investing or financing activities.
Calculating Cash Flow Per Share
The formula for calculating cash flow per share is straightforward. Simply divide a company’s cash flow from operating activities by its total number of shares outstanding. If a company generates $200 million from operations with 100 million shares, its cash flow per share is $2.
Cash Flow Per Share and Its Importance for Investors
Cash flow per share is a key metric for investors, providing insight into a company’s operational cash generation. Unlike net income, it’s unaffected by non-cash expenses like depreciation, enhancing its reliability in assessing a company’s financial health.
Investors also use cash flow per share to assess a company’s ability to pay dividends. A company with a high cash flow per share is more likely to sustain and grow dividend payments, usually funded by operational cash generation.
Cash flow per share helps identify robust cash generators, supporting growth or debt reduction. Additionally, a high cash flow per share signals industry advantage for sustained long-term growth.
How Companies Can Improve Cash Flow Per Share
Companies can improve their cash flow per share in several ways, including:
Increasing sales and revenue: A company can improve its cash flow per share by increasing its sales and revenue. Achieving this involves implementing marketing and advertising campaigns, expanding product lines, and entering new markets.
Reducing operating expenses: By reducing its operating expenses, a company can increase its cash flow from operating activities. Achieving this involves improving efficiency, renegotiating contracts, and outsourcing non-core activities.
Managing inventory levels: Inventory management is critical to cash flow management. By reducing excess inventory, a company can improve its cash flow from operating activities.
Collecting accounts receivable: A company can improve its cash flow by collecting accounts receivable more quickly. Enhance the credit approval process, incentivize early payments, and outsource collections to achieve this.
Examples of Industries That Use Cash Flow Per Share
Cash flow per share is a useful metric for many industries, including:
