Table Of Contents
Examples
Example #1
Mr. Unknown of Ethical analytics has to calculate the Cash Flow Per Share (CFPS) of Hypothetical Pvt. Ltd using the following data extracted from the financial statements of the company:-
Calculation of Weighted Average Number of Shares
For 2018 8-lakh shares for a full year and 2-lakh shares for a half-year
=8+2*6/12 =9 Lakh
For 2019 10-lakh shares for the full year
=10*12/12=10 Lakh
Therefore, the Calculation of CFPS for 2019 is-
Similarly, we have done the calculation of CFPS for 2018
Example #2
Ethical analytics again tasked Mr. Unknown to calculate the Cash Flow Per Share (CFPS) of another company XYZ Pvt. Ltd. But this time, data from cash flows statements are not available but are available from the income statement as given below:-
Solution:
Calculate CFPS for 2019 using below formula
- Cash Flow per Share Formula = (EBIT * (1 – tax rate) + Depreciation) / Common Shares Outstanding
- =(120*(1-36%)+40)/10
- =11.68
Similarly, we have done the calculation of CFPS for 2018
- = (100*(1-30%)+20)/9
- =10
Conclusion
- EPS is an important profitability metric, but CFPS should never be overlooked.
- Earnings can be manipulated, but cash flows present the true picture. Hence in finance and accounting, it is said that “Cash is the King.”
- To a certain extent, every company manipulates some numbers to increase or decrease their profit values. E.g. services to be provided over the next three years, the company recorded a lump-sum amount of all three years as revenue in the current year itself and inflated the overall value. a company should have distributed the revenue in all three years or record as and when received.
- Companies show assets worth billions in their books but never exist and charge heavy depreciation to lower their profit figures to pay fewer taxes. Classic examples are companies like Enron, Worldcom, Adelphia. Their Balance sheet looks extremely impressive and justifies the low-profit figures due to high depreciation costs. Such extreme manipulation enters the category of fraud.
- Investors must also study cash flow statements and calculate financial ratios like CFPS other than EPS or P/E ratio.
Frequently Asked Questions (FAQs)
The surging free cash flow to outstanding shares value is good since the company is considered to have better probability and more economic and operational flexibility. Thus, free cash flow per share is also known as free cash flow for the company.
The higher ratio is favored by investors, creditors, and analysts as more than 1.0, meaning a company may make up the current short-term liabilities. Yet, earnings may be left after clearing the liabilities
Yes, the cash flow per share can be negative. However, this occurs when a company's cash flow from operations is negative and significant outstanding shares exist. A negative cash flow per share indicates that the company is experiencing financial difficulties and may have trouble meeting its financial obligations.
Recommended Articles
This article has been a guide to Cash Flow Per Share and its definition. Here we discuss how to calculate Cash Flow Per Share and practical examples. We also discuss the difference between CFPS vs. EPS. You can learn more about accounting from the following articles –