Cash Flow per Share
Cash flow per share is a financial ratio that measures the operating cash flows attributable to each share of common stock. It is a variation of the earnings per share which substitutes net income with net cash flows from operations. While net income is subject to management judgment and discretion in choice of accounting policies and preparation of accounting estimates, the net cash flows from operating activities is more concrete figure, and potentially more reliable.
Formula
Cash flow per share | |
= | Cash Flows from Operating Activities – Preferred Dividends |
Weighted Average Number of Shares |
Weighted average number of shares is a figure calculated by weighting each share by the proportion of the year for which it remained outstanding.
If a company prepares its financial statements in accordance with IFRS and classifies the dividend paid to common shareholders as cash out flow from operating activities, it must add back the common dividends to the net cash flows from operating activities because they are part of cash flows attributable to common shareholders.
Example
Following is an extract from financial statements of Holiday Travel and Tours for financial years 2013 and 2014 prepared in accordance with US GAAP. All amounts are in million USDs.
2014 | 2013 | |
---|---|---|
Net income | 210 | 190 |
Preferred dividends | 20 | 44 |
Common dividends | 50 | 60 |
Common shares at the start of the financial year | 10 | 8 |
Common shares issued at the end of 2nd quarter | 0 | 2 |
Cash flows from operating activities | 150 | 110 |
Calculate cash flows per share for 2013 and 2014 and contrast it with earnings per share for the relevant years.
Solution
We need to calculate weighted average number of common shares for both years:
Weighted average shares (2013) | ||||
= 8 × | 12 | + 2 × | 6 | = 9 million |
12 | 12 |
Weighted average shares (2014)
= 10
2 million shares issued at the end of 2nd quarter of 2013 carries a weight of 50% representing the six (out of twelve) months for which they remained outstanding. There is no new issues in 2014, so the weighed average number of common shares for 2014 is equal to the opening common shares that remained outstanding for the whole year.
The following table summarizes the calculation of relevant ratios
2014 | 2013 | |
---|---|---|
Net income | 210 | 190 |
Less: preferred dividends | -20 | -44 |
Income attributable to common shareholders | 190 | 146 |
Weighted average number of common shares | 10 | 9 |
Earnings per share (USD per share) | 19.00 | 16.22 |
Net cash flows from operating activities | 150 | 110 |
Less: preferred dividends | -20 | -44 |
Net cash flows attributable to common shareholders | 130 | 66 |
Weighted average number of common shares | 10 | 9 |
Cash flow per share (USD per share) | 13.00 | 7.33 |
EPS has increased over the year and this fact is supported by the increase in cash flow per share over the same period. It suggests that the increase is EPS is not just due to any accounting trick rather is supported by actual cash flows. As an investor, we will feel more confident in our analysis.
by Obaidullah Jan, ACA, CFA and last modified on