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.