Cash Flow Per Share vs. Earnings Per Share
Original post by Shula Asher Silberstein of Demand Media
Financial statements often list the earnings per share -- how much each share of stock in the company would earn if the company paid out dividends today. Earnings per share is a useful measure of a company's financial worth. In addition, companies may also report on the cash flow per share, which is a measure of the company's total cash flow.
Earnings per share refers to how much each share of stock sold by the company has earned as a dividend during the reporting period. Cash flow per share measures the cash flow for the past 12 months relative to the average earnings per share. Thus, earnings per share shows how much an investor can expect to earn if he purchases stock while cash flow per share shows how the earnings per share impacts the company's cash flow.
Both earnings per share and cash flow per share can give investors an idea of how good an investment a company is. These statistics can also help investors compare large and small companies; small companies cannot sell as much stock as large companies, so comparing their earnings per share gives less information about their relative financial health. Thus, by examining the cash flow per share, investors can determine the impact of dividends on a small company's finances.
Investors can compare earning- per-share numbers for the past three to five years to determine whether a business is growing or shrinking during that time. If a business' earnings per share rate doesn't grow significantly or even decreases over time, the business is a weaker investment than if the earnings per share rate grows significantly every year. Cash flow per share doesn't provide this information as it is looking specifically at the company's cash flow, which can change many times over the course of the reporting period.
A company pays dividends to its stockholders on an annual basis based on the ratio of the market price of the stock to the earnings per share. If the market price divided by the earnings per share is close to zero, the company will not pay out dividends. Cash flow per share only impacts dividend payments in terms of the company's analysis of whether it has enough cash on hand to afford to pay investors.
- Principles of Accounting: Chapter 15 - Earnings Per Share
- Global Sources: Investor Relations Glossary - Cash Flow Per Share and Earnings Per Share
About the Author
Shula Asher Silberstein has been writing fiction and nonfiction since 2006. He writes about social issues, especially those of concern to the LGBTQ community. He has written a novel, "Shades of Gay." Silberstein holds a Master of Fine Arts in screenwriting and fiction from the University of Southern California.