Understand and Calculate Cash Flow per Share
Cash flow per share provides a measure of a firm’s financial strength and is frequently used by analysts in valuing a firm’s stock. Many of these financial experts believe that the amount of net cash a firm produces is a more important measure of its value than its reported earnings per share (EPS). While you hear more about a company’s price-to-earnings ratio (P/E) than almost any other metric, the P/E does not offer an accurate picture of a company’s ability to generate cash.
About Cash Flow and Cash Flow Analysis
Cash flow refers to the movement of cash into or out of a business during a specified, period of time. In observing cash flow, investors can identify problems with a business’s liquidity. This is an important observation because, while the company may be profitable, it can still fail due to a shortage of cash. Cash flow analysis is the study of the cycle of cash inflows and outflows for a business with the goal of identifying potential problems.
The Importance of Cash Flow per Share
The formula for cash flow per share can be written as:
CFPS = (Operating Cash Flow – Preferred Dividends) /
Common Shares Outstanding
Click Here to Open a Free Virtual Stock Trading Account Today!
To Collect Data for this Calculation
Go to Yahoo! Finance and enter the stock symbol in the Get Quotes window. Collect the necessary data in the statements under the Financial section on the lower left-hand side.
Cash Flow per Share and the Price/ Cash Flow Measure
Because EPS is a more easily manipulated measure, many analysts assign greater importance to a company’s cash flow per share.
The Price-to-Cash-Flow is determined by dividing the stock’s price by its cash flow per share. This measure is often preferred over EPS, which uses net income, because cash flow accounts for depreciation and amortization charges. A low ratio indicates that the cash flow is high relative to the stock’s price. A 10 to 1 ratio is considered to be standard when looking at the price to cash flow measure.
_______________________________________________________________
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
Recent Posts
- How to Calculate a Stock Market Profit
- Three Basic Financial Concepts for Investors
- Understand an Calculate the Capital Asset Pricing Model (CAPM)
- Calculate Your Retirement Savings Requirements
- The Basics of Stock Market Futures Trading
- How to Calculate Internal Rate of Return (IRR)
- How to Calculate Earnings per Share
- What the Par Value of a Stock Means
- Bond Value Calculator
- Some Basic Forex Trading Tips
Leave a Comment
You must be logged in to post a comment.