Cash flow per share is a measure of a company’s financial strength. Many analysts believe cash flow per share is a better measurement than earnings per share (EPS) because earnings per share can be more easily manipulated. Cash flow per share can be determined by taking the operating cash flow, subtracting the preferred dividends and then dividing by the number of common shares outstanding. This makes cash flow per share a more attractive indicator.
Investors will often consider cash flow return on investment, or CFROI, as an indicator of the value of a company. This calculation consists of cash flow divided by market value of capital employed. It is usually one of several methods used to value a company when determining if its stock is a good buy or not. Discounted cash flow, another valuation method, predicts the present value of future cash flows and discounts them to arrive at a company valuation.
There are several other financial ratios that relate to cash flow, each of which can be used to compare a company’s financial health to that of its competitors. Free cash flow is the amount of money a company has left over after it has made any necessary capital expenditures. It is calculated as net income plus amortization and depreciation, minus changes in working capital, minus capital expenditures. Operating cash flow is revenues minus all operating expenses. Free cash flow for the firm is operating cash flow, less expenses, taxes, changes in net working capital and changes in investments.
If a company has negative cash flow per share, it means that the company is using its venture capital to pay overhead expenses, and the company has not yet generated positive cash flow from its operations. This is known as the burn rate, and is expressed in the amount of money the company is spending over and above what it takes in, per month. Clearly, a company with a significant burn rate cannot remain in business for very long without making some changes.
If a company has excess cash flow per share, beyond what is needed for operations plus a comfortable cushion, it will often pay shareholders a dividend. The dividend is described as the amount each share receives, as in, “ABC Corp. declared a dividend of $0.15 U.S. Dollars (USD) per share.” Dividends are usually offered by established companies, as emerging companies require all the capital they can generate to fund operations and expansion. Dividends are paid on outstanding shares of preferred stock only.
