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Free Cash Flow per Share

Moneyzine Editor
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Moneyzine Editor
2 mins
January 18th, 2024
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Free Cash Flow per Share

Definition

The term free cash flow per share is used to describe a profitability metric that divides a company's free cash flow by the number of common shares outstanding. Free cash flow per share is thought to be the premier measure of a company's financial flexibility, which is their ability to react to unexpected expenses and investment opportunities.

Calculation

Free Cash Flow per Share = Free Cash Flow / Shares of Common Stock Outstanding

Where:

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Explanation

Profitability ratios allow the investor-analyst to gain a better understanding of a company's ability to generate profits. As is the case with many ratios, insights are more meaningful if the metric is tracked over time. Free cash flow per share takes the company's operating cash flow (less any capital expenditures) and divides it by the total number of shares of common stock outstanding.

Free cash flow per share is considered by many investor-analysts to be the best measure of a company's financial flexibility. For example, free cash flow (FCF) measures the cash generated by the company after subtracting new capital expenditures. These capital investments are typically made to replace aging equipment or to expand operating capacity. FCF is the money that could be used to make additional investments, pay down debt, or pay shareholders a dividend.

Investor-analysts believe a company's free cash flow per share is a more credible value than a company's earnings per share, which can be manipulated through liberal accounting practices. It's also a measure that investors track in parallel to a company's price per share, since an increase in free cash flow per share is typically followed by an increase in a stock's price.

Example

Company A's financial statements indicate operating cash flow of $10,580,000 last year. Company A's balance sheet also indicates there were $1,750,000 in capital additions in that same timeframe. The company's average number of shares outstanding was determined to be 5,000,000. The cash flow per share for Company A is calculated as follows:

= ($10,580,000 - $1,750,000) / 5,000,000 = $8,830,000 / 5,000,000, or $1.77 per share

Related Terms

  • Free Cash Flow (FCF)
    The financial investing term free cash flow refers to the money a company is able to generate after subtracting the costs necessary to maintain and expand the business. Free cash flow (FCF) is a metric that's closely tracked by both the company's financial decision makers as well as investor-analysts.
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  • The financial investing term operating cash flow refers to the money a company is able to generate through normal business operations. Operating cash flow (OCF) is a metric that's closely tracked by both the company's financial decision makers as well as investor-analysts.
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  • Earnings per Share (EPS)
    The financial ratio earnings per share, or EPS, is perhaps the single most popular variable used by analysts and investors to evaluate the profitability of a company. EPS measures the profitability of a company on a per share basis.
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  • Cash Flow per Share
    The term cash flow per share is used to describe a profitability metric that divides a company's cash flow by the number of common shares outstanding. Cash flow per share is thought to be a better measure of a company's ability to generate profits than earnings per share.
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