Cash Earnings per Share (Cash EPS) is a financial metric that measures the actual cash generated by a company’s operations on a per-share basis. Unlike traditional Earnings per Share (EPS), which is based on accounting profits, Cash EPS focuses on the real cash available to shareholders.
It excludes non-cash expenses such as depreciation and amortisation, giving investors a clearer picture of a company’s liquidity and ability to generate cash flows.
Key Takeaways
- Cash EPS focuses on cash flow rather than accounting profits, offering a clearer view of a company’s financial health.
- It is calculated by dividing operating cash flow (after adjustments) by the number of outstanding shares.
- A higher Cash EPS indicates stronger cash generation and the ability to fund dividends, debt repayments, and reinvestments.
- Investors use Cash EPS to cross-check reported EPS and assess whether earnings are backed by real cash flow.
Calculating Cash Earnings per Share
The calculation of Cash EPS is fairly straightforward, but it requires focusing on operating cash flows instead of accounting profits. The formula is:
Cash EPS = Operating Cash Flow / Number of Outstanding Shares
Where:
- Operating Cash Flow (OCF): The net cash generated from core business activities, typically found in the company’s cash flow statement.
- Outstanding Shares: The total number of shares currently held by all shareholders, including institutional investors and retail shareholders.
For example, if a company generates ₹1,000 crore in operating cash flow and has 100 crore outstanding shares, the Cash EPS would be ₹10. This figure highlights how much actual cash each share is generating.
Read More About Operating Cash Flow Margin
Interpreting Cash Earnings per Share
A higher Cash EPS indicates that a company is generating strong cash flows relative to its shares, which can be a positive signal for investors. It suggests better liquidity, improved debt-servicing ability, and potential for higher dividend payouts. On the other hand, if Cash EPS is consistently lower than accounting EPS, it may point to aggressive accounting practices or weak cash generation despite reported profits.
Benefits of Using Cash EPS
- Reflects True Profitability: Unlike traditional EPS, which may be inflated by non-cash items, Cash EPS reflects actual cash generation, making it a more reliable measure of financial strength.
- Better Dividend Assessment: Investors can use Cash EPS to evaluate whether earnings are backed by real cash, which improves the assessment of a company’s ability to maintain or increase dividends.
- Improved Comparability: Cash EPS allows better comparisons between companies, especially across industries where accounting policies may differ significantly.
- Enhanced Valuation Accuracy: Since company valuations are ultimately tied to cash flows, using Cash EPS can provide more realistic insights for valuation models such as the Price-to-Cash EPS ratio.
Conclusion
Cash Earnings per Share (Cash EPS) serves as a valuable complement to the traditional EPS measure by focusing on actual cash flows instead of accounting profits. By eliminating the effects of non-cash adjustments, it helps investors and analysts better evaluate a company’s financial health, dividend-paying ability, and operational efficiency.