The term cash flow per share is used to describe a profitability metric that divides a company's cash flow by the number of common shares outstanding. Cash flow per share is thought to be a better measure of a company's ability to generate profits than earnings per share.
Cash Flow per Share = (Operating Cash Flow - Preferred Dividends) / Shares of Common Stock Outstanding
Profitability ratios allow the investor-analyst to gain a better understanding of a company's ability to generate profits. As is the case with many ratios, insights are more meaningful if the metric is tracked over time. Cash flow per share takes the company's operating cash flow (less any preferred dividends) and divides it by the total number of shares of common stock outstanding. Operating cash flow adjusts a company's net income for non-cash expenses such as depreciation and amortization as well as working capital.
Investor-analysts believe a company's cash flow per share is a more credible value than a company's earnings per share, which can be manipulated through liberal accounting practices. Cash flow is considered more difficult to manipulate since it measures the net amount of cash generated by operations. For this reason, investor-analysts believe cash flow per share provides a more accurate assessment of a company's profitability.
Company A's financial statements indicate operating cash flow of $10,580,000 last year. Company A also reported the payment of $250,000 in preferred dividends. The company's average number of shares outstanding was determined to be 5,000,000. The cash flow per share for Company A is calculated as follows:
= ($10,580,000 - $250,000) / 5,000,000
= $10,330,000 / 5,000,000, or $2.07 per share