This is an ultimate guide on how to calculate Cash Earnings per Share Ratio (Cash EPS) with detailed analysis, interpretation, and example. You will learn how to use its formula to assess a company's cash flow.
Definition - What is Cash Earnings per Share Ratio?
There are 5 types of earnings per share that can be calculated to better understand how strong a company is positioned financially.
One extremely useful type is the cash earnings per share ratio or the operating cash flow per share.
This one will give you a clearer insight because a company’s operating cash flow cannot be manipulated so easily. So you’ll get a better understanding of exactly how much the company has earned.
To calculate cash earnings per share, you just need to divide your operating cash flow by the diluted shares outstanding.
So the formula would look like this:
Cash Earnings Per Share = Operating Cash Flow / Diluted Shares Outstanding
This formula will tell you how much cash flow the company generates on a per share basis.
Let’s say Company ABC has a total net income of $9,750,000 for the fiscal year. But their operating cash flow is $7,800,000.
When fully diluted, the company’s shares outstanding totals 1.7 million.
Using the correct cash EPS formula, the equation would be:
This gives the company a cash earnings per share of about $4.59 per share.
Interpretation & Analysis
In the example above, an operating cash flow per share of $4.59 is very respectable.
However, it’s not really possible to say whether it is high or low until you look at it in comparison.
You will need to compare this figure to the following:
- Cash EPS for the company in previous years.
- Cash EPS of the company’s industry competitors.
- The reported GAAP EPS for the company in the same year.
What you would want to find in making these comparisons is an upward trend in cash EPS over the years.
That would signal that Company ABC has been consistently generating more cash per share over time.
You also want to see that the company’s operating cash flow per share is strong relative to the others in its industry.
At the very least, it should not drop below the average.
Finally, you want to compare the cash EPS to the GAAP EPS.
The latter is the earnings per share figure that is reported on a company’s SEC filings.
If the $4.59 cash EPS is lower than the GAAP EPS, this would be a red flag.
If the cash EPS is higher than the GAAP EPS, however, it would be an impressive sign that the company is growing strong.
The latter situation is rare but if you find one, it is almost always a good investment.
In general, you just want to make sure that both cash EPS and GAAP EPS are telling more or less the same story.
Cautions & Further Explanation
The cash earnings per share is considered to be the more honest, realistic measure of a company’s earnings per share.
However, you need to be thorough in your usage of it. For example, Company ABC in the example had a cash flow per share of $4.59.
Let’s say you are comparing that ratio to Company XYZ which currently has a cash flow per share of $6.25.
Using just this information, you might assume that Company XYZ is the better choice.
However, you might dig deeper and find that Company ABC has a reported GAAP EPS of $3.40 while Company XYZ has a reported GAAP EPS of $8.60.
That means that our example company is actually in a stronger position than Company XYZ even though it has a lower cash EPS on face value.
So this is an important ratio to look at but it’s equally important to look at it in full context.