Cash Earnings Per Share

Cash flow that a company has generated on a per share basis

What is Cash earnings per share (Cash EPS)?

Cash earnings per share (cash EPS) is the operating cash flow generated by a company divided by the number of shares outstanding.  Cash earnings per share (Cash EPS) is different from traditional earnings per share (EPS), which takes the company’s net income and divides it by the number of shares outstanding. In other words, the latter measures how much of the company’s profit can be allocated to each share of stock, while the former measures how much cash flow can be allocated to each share of stock.

A company with higher cash EPS is considered to have better financial performance and a better ability to generate cash flow.  Cash EPS can be used to compare the company against its peers or against its own past results/guidance.

cash eps

 

Calculating Cash EPS

We calculate Cash EPS by adding non-cash transactions i.e. amortization, depreciation, deferred tax among others, back into Net Income to find operating cash flow. 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 accounting impact.

 

Note: Cash EPS is different from Diluted EPS. Diluted EPS refers to net income divided by the number of fully diluted shares outstanding (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 (cash EPS) shows the ability of the company to generate cash flow that can be used for many things, including: service its debts, pay shareholders’ dividends and undertake other transactions. A company with higher cash earnings per share is said to be worth more per share than a company with low cash EPS (all else being equal).

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.

As a general rule with investors, high earnings per share growth leads to a rise in the company’s share price.

In order to compare the value of two different companies, the price earnings ratio can be a helpful starting point.

 

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