Saxo Group
Before we talk about cash flow per share, it’s important to break down the basics of cash flow and shares. Understanding these two concepts in isolation will help you get a grasp on cash flow per share, not only as a measure of profitability but a company’s investment potential.
Cash flow is the amount of money (or money equivalents, i.e. things of value) flowing into and out of a company. This flow of money is formed by two streams: income and outgoings. The balance of these streams is important.
Specifically, a company wants its inflow to be greater than its outflow. When this happens, a company is making more than it is spending/losing. This results in positive cash flow, which means the company has more money free to reinvest into the business or return to shareholders.
Inflow is made up of money generated from sales, investments, and financing. Outflow is the company’s financial liabilities. These liabilities can be debt, operating costs, and other money that needs to be paid out. The balance of this determines the overall cash flow.
When there is more positive inflow, we consider the amount of free cash flow there is, such as how much free cash there is left after everything else is covered. More free cash flow means there is more money for shareholders.
Shares entitle the holder to a stake in a company’s financial fortunes. All public companies have a share structure that allocates a certain amount of stock for public consumption. This means a certain number of shares are available to the general public.
These shares can be bought and sold on exchanges. The holder of a share/shares owns a piece of the company. This entitles them to a share in the company’s profits if dividends are paid. This is known as investing. You don’t need to own shares to have an interest in public companies.
You can also trade shares. Doing this gives you the ability to take a long position and profit when the share price increases. So, in this way, you have an indirect stake in a company and its financial fortunes. Why is this important? Because a company’s share price is linked to its performance.
If the company is doing well and making lots of money, there’s a strong chance its share price will be bullish (i.e. increasing in value). This brings us back to the concept of cash flow. This can be used as a performance marker. So, if a company has positive cash flow, it can help the share price. That’s why investors and traders care about cash flow and cash flow per share.
We know that cash flow is a performance metric that can affect a company’s share price. Determining how significant cash flow is for a company’s share price requires you to be a bit more nuanced than looking at whether the flow is positive or negative.
Positive cash flow is important, but shareholders want to know how this directly relates to the value of their shares. They also want to know that positive cash flow is sustainable. A company that puts itself in a position where the money coming in always outweighs the money going out is considered a solid long-term proposition.
This is established by looking at the cash flow per share, which is the amount of net cash flow allocated to each share. This simply means we’re looking at how the positive cash flow breaks down on a per share basis. The cash flow per share calculation is this:
Net cash flow / Average number of shares = Cash flow per share
Let’s put this equation into an example:
In this example, the cash flow per share is $20. Analysts often consider cash flow per share a better measure of a company’s financial strength than earnings per share. To understand earnings per share, we divide a company's net profit by its outstanding shares.
This is a useful performance metric, but profit doesn’t tell us how much money the company has free to distribute to shareholders. In other words, some of the profit could be allocated to other areas of the business that might not necessarily benefit shareholders.
You don’t need to look for specific targets regarding cash flow per share. $10 cash flow per share is better than $1, but both numbers are positive. So, you should focus on whether the cash flow per share is negative or positive. Then, if the figure is positive, the higher the number, the better.
You can determine a company’s cash flow in a variety of ways. Most publicly listed companies produce a cash flow statement. If a cash flow statement isn’t available, you can work out what it might be by comparing non-cash expenses to net income.
The three main ways to determine a company’s cash flow are:
Balance sheet: This gives an overview of a company’s assets and liabilities. This allows you to see how much money it has, as well as the amount it owes/pays out.
Income statement: This report shows you how much revenue and profit/loss a company has during a certain period, such as a quarter (three months).
Cash flow statement: This report combines information from the balance sheet and income statement. It provides an overview of a company's cash transactions i.e. the money coming in (inflows) and the money going out (outflows) during a given period.
These reports can give you an overview of a company’s financial position. Once you know the cash flow, you can divide this by the number of outstanding shares to get a cash flow per share figure. This figure can determine whether shares are worth trading. To put this information into practice, create a demo account at Saxo and start trading shares today.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.