Cash Earnings Per Share

Cash earnings per share (Cash EPS) is a ratio, which measures financial performance based on the cash flow that the company has generated on a per share basis.

What is Cash earnings per share (Cash EPS)?

Cash earnings per share (Cash EPS) is simply the cash generated by a company on every share. It is the ratio of the company’s cash flow to the number of shares. Cash earnings per share (Cash EPS) is different from basic earnings per share (EPS), which focuses on the company’s net income on a per share basis. In other words, the latter measures how much of the company’s profit can be allocated to each share of stock. A company with higher cash EPS is considered to have financially performed better.  The cash EPS is used to compare the company against its peers or against its own past results.

Calculating Cash EPS

We calculate Cash EPS by adding non-cash transaction i.e. amortization, depreciation, deferred tax among others, back into Net Income to find operating cash flows. This is then divided by the number of shares.

Cash EPS = Operating Cash Flow / Diluted Shares Outstanding

A non-cash transaction is one that is captured in the company’s income statement but did not involve actual cash flow during the period recorded. For example, depreciation expense is deducted from net income, but does not actually involve any outflow of cash. Thus, this must be added back to net income to remove the artificial effect of an outflow.

Cash EPS is different from Diluted EPS. Diluted EPS is a metric used to measure the earnings per share of a company if all its convertible securities are exercised.

Convertible securities refer to a company’s outstanding warrants, stock options, convertible debenture and convertible preferred shares. The company’s diluted EPS will always be lower than the Cash EPS.

Interpreting Cash Earnings Per Share

Cash earnings per share shows the ability of the company to service its debts, pay shareholders’ dividends and undertake other transactions. A company with higher cash earnings per share is said to have strong annual growth in earnings over the years. A company with lower cash earnings per share is said to have a weak growth in earnings over the years. In other words cash earnings per share is any market prospect or profitability ratio. A company with higher earnings per share is said to be more profitable and able to distribute more profits to its shareholders.

Although it is not always given much weight by many investors, a high earning per share always lead to a rise in the company’s share price. Investors always tend to ignore its applicability in forecasting the price of a stock because it’s manipulated by many factors.

A stock option is a contract between two parties which gives the buyer the right to buy or sell underlying stocks at a predetermined price and within a specified time period.

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