Cash Flow Per Share

  

Shareholders crave positive cash flow for the companies in which they invest. It's a sign of financial health. It shows that the firms have enough cash on hand to manage day-to-day operations (without loans or burning other capital) and will be able to invest in future growth.

The most common figure to measure a company's financial fortune is called earnings per share. Cash flow per share gets less press, but can be even more important. There are various ways companies can use accounting rules to manipulate earnings per share (in a legal way...sometimes, illegal ways too, but we're mostly talking about legal juking of the earnings stats here). However, it's much harder to manipulate actual cash...either the money's there or it isn't. Not as many accounting tricks can get pulled.

The official formula to measure cash flow per share is: (cash flow - preferred dividends)/shares outstanding. Dividends are subtracted because they reduce the amount of cash.

So let's say We Share It All Inc. has a positive cash flow of $5 million at the end of their second quarter. Because of this great cash flow and to share the wealth, they distributed preferred dividends during the quarter of $600,000. With 8 million shares of stock outstanding, their cash flow per share would be: $5,000,000 - $600,000 / 8,000,000 = $0.55 per share. Not bad. Savvy analysts and investors look at both earnings per share and cash flow per share to get an accurate picture of the company's financial health and their true valuation in the stock market.

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Finance: What is cash flow v earnings?17 Views

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Finance allah shmoop what is cash flow versus earnings Okay

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you think profits or profits right Well not unless you

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spell it P r o p h e t s

00:14

Ask a gandhi or jeff bezos about that All right

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Well in the land of accounting there are aptly named

00:20

accounting profits and there are also cash profits and the

00:25

two of them are often very different Accounting laws skew

00:29

things when it comes to assessing riel cash profits Here's

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out the ceo and founder of give a dog a

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drone A company that specializes in engineering remote control toys

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for your pets built a drone stamping factory for one

00:43

hundred million dollars knowing that it will be worth twenty

00:46

million dollars in scrap value in just four years Well

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he'll sell at that point and possibly upgrade if demand

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for puppy and kitty tech is still high will drone

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sales or steady producing cash profits of fifty million bucks

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a year each year into the foreseeable future but stated

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earnings and cash flows here are very different In the

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first year when the factory was built the company lost

01:10

big cash money because it had to write one hundred

01:13

Million dollar check to the builder of the factory Yes

01:16

it made fifty million in profits but that year it

01:20

lost fifty million dollars in cash Luckily it had no

01:24

debt and it had one hundred twenty five million dollars

01:27

in the bank Well that bank account went down to

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just twenty five million when they wrote one hundred million

01:32

dollar check But it gradually filled back up to seventy

01:35

five million by the time that year was done fifty

01:38

million of profits and that fifty million in cash Yeah

01:41

that that helps that floated right back in there Okay

01:44

so the cash that year was volatile It was a

01:46

hundred twenty five million to start But then i went

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down to twenty five million after the factory purchase than

01:50

end up a year later with fifty million added to

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their coffers and gas profits from operation leaving them with

01:57

seventy five million bucks in the bank got all that

01:59

All right So here's where the difference hits between accounting

02:02

profits perspective and a cash flow perspective on the notion

02:06

of profit Simply put it isn't fair for the company

02:09

Tohave a view that the one hundred million dollars factory

02:13

as an expense should all hit the profits line all

02:17

in one year as if they bore the burden of

02:19

all that factory cost in one year and then showing

02:22

it is being worthless in years Two three four and

02:26

maybe beyond In fact the company doing proper accounting depreciates

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that factory in value to the tune of twenty million

02:34

dollars a year for for four years until it will

02:37

then sell it for scrap for twenty million bucks So

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that hit to the company in the first year should

02:42

be twenty million dollars in value not one hundred million

02:46

in cash That's an accounting change of assessing twenty million

02:50

in expenses not one hundred million how's that work well

02:53

the decline in value of that hundred million dollars takes

02:56

five years And it looks like this But in your

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won the company loses one hundred million dollars in cash

03:01

but gains a factory Confused Good Okay well let's zoom

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forward to your floor The company again made fifty million

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dollars in cash profits but it will show earnings of

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only thirty million Why Well because proper accounting using straight

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lined appreciation of that hundred million dollar factory properly shows

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the company depreciating it's value another twenty million dollars against

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its cash profitability So what A thirty percent tax rate

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company pays taxes on thirty million of profits or a

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tax bill of nine million bucks It's accounting earnings are

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actually twenty one million dollars but it will have produced

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cash or cash flow of fifty million dollars minus the

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nine million in taxes or forty one million in cash

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profits I either Cash flow is almost double the reported

03:47

accounting profits Now with all that profit our company can

03:50

finally start mass producing kitty copters Yeah yeah we're naming 00:03:55.308 --> [endTime] this cat todd

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Finance: How is inventory managed for cash flow purposes?
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