Cash Earnings Per Share (Cash EPS)

What is Cash Earnings per Share (Cash EPS)?

Cash earnings per share (cash EPS) is the operating cash flow generated by a company divided by the number of shares outstanding. Cash earnings per share (Cash EPS) is different from traditional earnings per share (EPS), which takes the company’s net income and divides it by the number of shares outstanding. In other words, EPS measures how much of the company’s profit can be allocated to each share of stock, while Cash EPS measures how much cash flow can be allocated to each share of stock.

Cash earnings per share (Cash EPS) is a profitability ratio that compares a company’s cash flow against their volume of shares outstanding. It is unique from the more widely used net profit metric, earnings per share (EPS), which only considers net income per share.

Cash EPS doesn’t take into account any non-cash elements. For example, it doesn’t include depreciation which is part of profit-based earnings per share calculations. Because of this, CEPS can be a more accurate measurement of a company’s financial and operational states. The bigger a company’s CEPS, the better its performance is believed to be over for the particular period considered.

The CEPS ratio comes in handy when comparing trends within a company, and trends among different companies in like industries.

Cash Earnings Per Share Formula

To calculate cash earnings per share formula you have to sum up net income with non-cash items such as deferred tax, depreciation and amortization and then dividing it by the number of outstanding shares.

Cash EPS = Operating Cash Flow ÷ Number of Shares Outstanding

All the data needed to calculate cash EPS can be found in the financial statements and notes to accounts. For the most accurate CEPS calculation, it is crucial to determine all of the non-cash elements in the income statement.

Alternatively, the cash EPS formula can be calculated using EBITDA like this:

Cash EPS = (Net Income + Depreciation & Amortization × (1 - tax)) ÷ Number of Shares Outstanding

Both of these formulas can yield slightly different results due to the inclusion of change in working capital in the first formula. Hence, investors more commonly use the first formula. Analysts can find all these items in the financial statements and notes to accounts. It is important to identify the non-cash elements in the Income statement to accurately calculate CashEPS.

Operating Cash Flow is EBITDA plus change in working capital and other non-cash adjustments. This value is stated by the company in the Cash flow statement.

Net Income, Depreciation & Amortization, tax are stated in the Income statement.

Number of shares outstanding could be either basic or diluted and both can be found in the notes to accounts.

Operating cash flow, which is indicated in a company’s cash flow statement, is simply EBITDA with the addition of change in working capital and all other non-cash modifications. The number of shares outstanding may be basic or diluted and are found in the notes to accounts, and all the rest are included in the income statement.

When a company has high cash earnings, it may indicate that they are performing very well. Analysts usually consider the annual growth rate of the ratio over a number of years. As a result, this means a high growth rate over time is a positive sign.

The CEPS of one company may also be compared with those of other companies within the same industry and with similar product varieties. This is one key benefit offered by CEPS over regular EPS. Because CEPS may be adjusted for all non-cash items, largely drawn from management estimates, it enables analysts to compare the values for several companies.

Earnings Per Share vs. Cash Flow Per Share

A company’s earnings per share is the portion of its profit that is allocated to each outstanding share of common stock. Like cash flow per share, earnings per share serves as an indicator of a company’s profitability. Earnings per share is calculated by dividing a company’s profit, or net income, by the number of outstanding shares.

Since depreciation, amortization, one-time expenses, and other irregular expenses are generally subtracted from a company’s net income, the outcome of an earnings per share calculation could be artificially deflated. Additionally, earnings per share may be artificially inflated with income from sources other than cash. Non-cash earnings and income can include sales in which the purchaser acquired the goods or services on credit issued through the selling company, and it may also include the appreciation of any investments or selling of equipment.

Since the cash flow per share takes into consideration a company’s ability to generate cash, it is regarded by some as a more accurate measure of a company’s financial situation than earnings per share. Cash flow per share represents the net cash a firm produces on a per-share basis.

Cash Earnings Per Share Example Analysis

Investors will always look at the performance of the company by considering operating cash flow relative to the company’s net income. Therefore a higher Cash EPS implies that the company is performing well. This is a metric that analysts look at to ascertain if the company has been growing over the higher and thus a higher growth rate is favorable. Most importantly one can compare Cash EPS of companies operating within the same sector dealing with handling the same product mix. This is the upside of the Cash EPS relative to normal EPS because it is adjusted for non-cash transactions it lets investors and analysts have a comparison of two companies.

Basic EPS is also disposed to accounting manipulation thus making it an unreliable metric for the company’s performance. Management can use this to mask the performance of the company especially considering nowadays stock repurchase programs instead of dividends are becoming famous as a way of returning profits to stockholders. As a result, some executives can increase EPS through the reduction of the outstanding stock and therefore use EPS to hype their compensation programs. This is where Cash EPS becomes important as it can do away some of the issues apparent in accounting manipulation.

If the CEPS of a company have been decreasing then it might be because the company issued more equity stock to get capital for funding expansion plans. Interestingly the plan might increase earnings in the long term or the number of shares might have increased because of the conversion of additional stock options.

Benefits of Using Cash EPS

  • CEPS is less prone to accounting manipulation, which offers a clearer picture of cash flow and real earnings. Added transparency is a sign of good corporate governance.
  • CEPS shows investors on a per share basis how much profit each share generates. This helps identify incremental value.
  • CEPS is not subject to the same short-term market focus seen with EPS.

Final Statements

Using Cash Earnings per Share comes with a great advantage over using normal EPS, as the CEPS is specially adjusted for non-cash items – this allowing the analysts to compare their results and numbers with those of different companies.

If a company has high cash earning, then this might mean that the said company has a strong underlying performance. As an analyst, you would look into the annual growth rate of this profitability ratio – over several years, of course – expecting to find a high growth rate, which is something that every company out there wants.