Cash flow per share (CFPS) is a crucial financial metric that helps investors evaluate a company's ability to generate cash from its operations. In this article, we will explain what cash flow per share is, how it is calculated, and why it is important for investors. We will also discuss how companies can improve their cash flow per share and provide examples of industries that use this metric.
What is Cash Flow Per Share?
Cash flow per share is a financial ratio that measures the amount of cash generated by a company's operations on a per-share basis. This metric is calculated by dividing a company's cash flow from operating activities by the total number of shares outstanding.
Cash flow from operating activities is the cash generated or used by a company's normal business operations, including the sale of goods or services, payment of operating 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. For example, if a company has 100 million shares outstanding and generates $200 million in cash from operating activities, its cash flow per share would be $2.
Cash Flow Per Share and Its Importance for Investors
Cash flow per share is an essential metric for investors because it helps them evaluate a company's ability to generate cash from its operations. It is a more reliable indicator of a company's financial health than net income because it is not affected by non-cash expenses such as depreciation.
Investors also use cash flow per share to assess a company's ability to pay dividends. Dividend payments are typically funded from cash generated from operations. Therefore, a company with a high cash flow per share is more likely to be able to sustain and increase its dividend payments.
Furthermore, cash flow per share can help investors identify companies with strong cash-generating capabilities, which can be used to fund growth opportunities or pay down debt. A high cash flow per share can also indicate that a company has a competitive advantage in its industry, which can help it sustain 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. This can be achieved through 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. This can be achieved by 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. This can be achieved by improving the credit approval process, offering incentives for early payment, and outsourcing collections.
Examples of Industries That Use Cash Flow Per Share
Cash flow per share is a useful metric for many industries, including:
