Operating Cash Flow Per Share Formula & Example

Operating cash flow per share is a key financial metric used to evaluate a company’s financial strength and operational efficiency. It is a widely utilized indicator by financial analysts, investors, and other stakeholders for assessing the intrinsic value of a company’s stock. This ratio provides insights into a company’s ability to generate cash from its core operational activities, making it a more reliable indicator of financial health compared to other traditional earnings-based metrics, such as reported earnings per share (EPS).

The fundamental reason why operating cash flow per share is considered more informative than EPS lies in its reliance on actual cash flow rather than accounting-based earnings. EPS is based on a company’s reported income, which can be influenced by non-cash accounting adjustments, subjective judgments, estimates, and other financial maneuvers. For example, earnings can be manipulated through methods such as changes in depreciation schedules, deferral of expenses, or the use of accrual accounting policies. These adjustments can create a situation where reported earnings do not accurately represent the cash that a company has generated or has on hand. Operating cash flow per share, by contrast, focuses on the actual cash generated from a company’s day-to-day business operations, offering a clearer and more direct view of its financial condition.

Operating cash flow per share measures how much cash a company generates from its operating activities on a per-share basis. This ratio offers investors and financial analysts a tool for evaluating the company’s liquidity and financial stability. It provides a snapshot of the company’s ability to produce cash flow from its core business operations, excluding non-operating activities such as investments and financing decisions. This is essential because a strong cash-generating ability from core business functions reflects the sustainability and reliability of a company’s business model. A company that consistently generates positive operating cash flow per share demonstrates a strong operational foundation, which is crucial for maintaining day-to-day expenses, funding growth opportunities, paying down debt, and rewarding shareholders through dividends or stock buybacks.

Financial analysts prefer operating cash flow per share over EPS because cash is harder to manipulate than accounting-based earnings. While earnings per share can fluctuate based on accounting policies, estimates, and market conditions, cash flow per share reflects actual cash received or spent. As a result, it is often a more trustworthy measure of a company’s financial performance and stability. Investors rely on this metric to make informed decisions about a company’s stock valuation. A company with strong and consistent operating cash flow per share suggests a well-managed business with predictable revenue streams, steady demand for its products or services, and efficient cost management.

The primary advantage of focusing on operating cash flow per share is its ability to separate actual cash-generating performance from accounting anomalies. For instance, a company might report high profits on the income statement but struggle with liquidity because accounts receivable are growing faster than cash collections or because inventory levels are unnecessarily high. These situations would show strong profits but weak cash flows, highlighting the limitations of EPS as a sole indicator of financial strength. In contrast, operating cash flow per share provides a direct measurement of cash flow, offering a more accurate picture of whether a company has enough liquidity to meet its financial obligations.

Operating cash flow per share also allows investors to identify trends over time, which can signal whether a company is improving or deteriorating in its ability to generate cash. A rising operating cash flow per share indicates that the company’s operational performance is improving, reflecting higher revenue, better cost management, or improved collections from customers. Conversely, a declining ratio may signal that a company is facing challenges in generating sufficient cash, such as declining sales, increased costs, or inefficiencies in managing receivables. This trend analysis is essential for predicting the company’s future financial performance and identifying risks.

Furthermore, operating cash flow per share plays an important role in company valuation. When valuing a company’s stock, analysts look at how much cash flow is available to shareholders. Cash flow is a critical component of valuation models because it represents the actual cash that can be used for dividends, stock repurchases, or reinvestments into the business. Since cash is more stable and less subject to manipulation than earnings, operating cash flow per share provides a more transparent and trustworthy measure for estimating a company’s intrinsic value. Investors can compare a company’s operating cash flow per share to its stock price to determine whether the stock is overvalued or undervalued.

For companies in industries that experience high levels of volatility, seasonality, or economic cycles, operating cash flow per share is particularly important. During periods of economic downturns, a company with a strong and stable operating cash flow per share may be better equipped to weather challenges, such as decreased consumer spending, supply chain disruptions, or rising costs. This financial strength allows companies to maintain their operations, invest in growth opportunities, or pay down debt even when profits may be declining.

In addition to its role in evaluating liquidity and financial performance, operating cash flow per share is also critical for understanding a company’s ability to pay dividends. Shareholders often rely on dividends as a source of income, and dividends are paid out of cash, not accounting profits. Companies with strong and consistent operating cash flow per share are more likely to sustain dividend payments, even during economic uncertainty. This makes it a valuable metric for income-focused investors who prioritize steady and reliable dividend payments.

In conclusion, operating cash flow per share serves as a vital financial metric that provides a clearer, more accurate representation of a company’s financial health compared to reported EPS. It focuses on the actual cash generated by a company’s core operations rather than accounting-based earnings, offering a reliable measure of liquidity, financial stability, and operational efficiency. Investors, financial analysts, and stakeholders rely on this ratio to make informed decisions about company valuation, liquidity assessments, and investment opportunities. Operating cash flow per share allows companies to demonstrate their ability to generate cash, weather financial challenges, and maintain investor confidence through consistent and transparent performance.

Formula:

Operating cash flow (OCF) per share = (Operating Cash Flow - Preferred Dividends) / Common Shares Outstanding
Or,
Cash flow per share = (Profit after tax + Depreciation + Non cash charges) / Number of equity shares

Example 1:
Calculate the OCF per share for Lincoln plc, given the following information:
Net cash flow from operating activities $100,000
Ordinary share capital of $0.50 each: $500,000

Solution:
Number of ordinary shares issued = 500,000 / 0.50 = $1,000,000
OCF per share = 100,000 / 1,000,000 = $0.10

Example 2:
Eric Ltd has the following information: Depreciation $50,000; Profit before tax $250,000; Tax $30,000; Number of equity shares 900,000.
Then,
Profit after tax = 250,000 - 30,000 = $220,000
Cash flow per share = (220,000 + 50,000) / 900,000 = $0.30