How Investors Figure the Operating Cash Flows per Share
The operating cash flows per share is a reliable measure of a company’s financial strength. Although earnings per share directly measures the amount an investor makes on his shares and is, therefore, the more popular investment measure used, a more reliable measure in terms of the company’s financial strength is the operating cash flows per share:
Here’s how to use this equation:
Find the operating cash flows in the operating cash flows portion of the statement of cash flows and the preferred dividends on the income statement near the bottom.
Use the balance sheets of the current year and previous year to calculate the average outstanding common shares:
Add the number of outstanding common shares from the current period and the number from the previous period and divide the sum by 2.
Subtract the value of the dividends paid to preferred shareholders from the operating cash flows.
Divide your answer from Step 3 by your answer from Step 2; the answer is your operating cash flows per share.
Because operating cash flows per share measures only the value of the company’s operations without considering other sources of cash flows, it better reflects the company’s long-term core operations. However, it doesn’t measure the company’s full profitability as earnings per share does.
In other words, use both to evaluate a company’s operations and profitability. The degree of differential between cash flows per share and earnings per share provides some idea of how the company is allocating resources. A larger differential may mean that the company is very inefficient, or it may mean they’re manipulating earnings.