What is “Cash Flow Per Share?”

Cash flow per share shows a company’s free cash flows on a per-share basis and is used by investors and analysts as a measure of a company’s investment performance. It is calculated as free cash flow for the period divided by weighted average shares outstanding. The free cash flow represents the cash that is left with a company after accounting for cash outflows on operational and capital expenditures.

Key Learning Points

  • Cash flow per share is calculated as free cash flow for the period divided by the weighted average shares outstanding;
  • Compared to net income, cash flows are less prone to loopholes in accounting which may distort the financial performance of the company;
  • Free cash flows represent the amount available to equity holders before dividends are paid; and
  • Weighted average shares outstanding represent the number of shares outstanding after adjusting for any changes in the share count during the period

Cash Flow Per Share – Formula

The formula for the computation of cash flow per share is stated below:

Cash flow per share = Free cash flow / Weighted average shares outstanding

Free Cash Flow

Free cash flow is defined as net operating profits less interest paid, less cash taxes paid, plus depreciation, plus or minus the decrease (increase) in working capital, less capital expenditure. As such, it represents the cash flow available to the equity shareholders before dividends are paid.

Weighted Average Shares Outstanding

Weighted average shares outstanding (WASO) is calculated after time weighting the number of shares outstanding (both basic and diluted) for any changes in the share count during the period in question.

WASO includes the impact of events like share repurchases or issuance of new shares during a period. Since the free cash flows have been generated across the financial year, it is better to use a share count which reflects the full year’s activity. WASO provides a more reasonable share count compared to basic shares and is also used in the calculation of EPS.

Calculating Cash Flow Per Share – An Example

The cash flow per share for this company has been calculated below, based on this information:

Calculating Free Cash Flow

The first step in calculating free cash flow is to compute the NOPAT or net operating profit after tax, which represents the after-tax, pre-financing profits of a company.

To derive the same, we deduct depreciation and amortization from EBITDA to calculate the taxable operating profit or EBIT. Tax is calculated based on EBIT (EBIT * Relevant tax rate). Finally, tax is deducted from EBIT to arrive at NOPAT.

Next, based on NOPAT,  the free cash flow is computed below:

Depreciation and amortization are non-cash expenses and must be added back to NOPAT. Capital expenditures, which represent cash outflows to purchase additional fixed assets are deducted. A negative operating working capital figure represents cash outflows and thus has been deducted from NOPAT.

Calculating WASO

We can assume the company does not have any dilutive instruments, and both the basic and diluted number of shares outstanding are the same. The only change to the share count during the year was a buy back that happened after 6 months. Therefore, only 6 months of impact is included in the weighted average share count. The calculation is as follows:

Calculating Cash Flow Per Share

Finally, the cash flow per share has been calculated below:

The shareholder expects to receive 2.1 in cash for each share owned.

Since cash flow is less easily manipulated by accounting policies than the earnings reported by a company, the former is thought to be a superior indicator of a company’s investment performance by many investors.

However, cash flow as a measure of investment performance has its flaws. This is because cash flow may be low or negative for start-ups and rapidly growing companies. Even for more mature companies, the same will typically be subject to greater volatility than with earnings measures. Therefore, one should not rely only on cash flow metrics as an indicator of a company’s investment performance.