Posted in Finance, Accounting and Economics Terms, Total Reads: 501
Definition: Free Cash Flow Per Share
Free Cash Flow Per Share is the measure of the amount of cash flow is generated per share after accounting for capital expenditure like assets, materials, infrastructure etc. Free cash flow determines ability of the firm to give dividends, service debt, buy back stock, perform other transactions and facilitate the growth of business.
Free Cash Flow Per Share = (Operating Cash Flow - Capital Expenditures) / (Shares Outstanding)
= Free cash flow/ Number of Shares Outstanding
Also called as Cash Earnings per Share, is used by analyst who believe amount of net cash flow is a better indicator of value than the reported EPS. Cash flow is an insight into company's cash generating engine.
It can be used as a prediction of share prices. Almost all cash flows are influenced by operational activities of the firm which in turn is influenced by the net income of company. Companies with high FCF are less likely to default and hence are a measure of company's solvency.
For e.g. when a company has high cash earnings per share and a low share price, the odds are high for the company to have strong earning and the share price will soon rise because a high cash flow per share means that earning per share should be high as well. This happens due to higher revenue, lower overhead and high efficiency which drives cash flow from operations. The disparity in high free cash flow and low share prices often means share prices will rise.
A comparison of free cash flow per share and EPS gives an indication of how well has the company turned its earnings to cash. The best companies for investments are the companies with 'cash machines', more free cash flow per share than earnings per share.