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Calculating CFPS
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Interpreting CFPS
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Here’s what else to consider
Cash flow per share (CFPS) is a financial ratio that measures how much cash a business or a project generates for each share of its equity. It is often used to compare the profitability and valuation of different businesses or projects, especially when earnings per share (EPS) are distorted by accounting methods, depreciation, or non-cash items. In this article, you will learn how to calculate and interpret CFPS, and how to use it to value a business or a project.
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1 Calculating CFPS
To calculate CFPS, you need to know two numbers: the cash flow from operations (CFO) and the number of outstanding shares. CFO is the amount of cash that a business or a project generates from its core activities, excluding financing and investing activities. You can find CFO in the statement of cash flows of a business or a project. The number of outstanding shares is the total number of shares that are issued and held by investors. You can find it in the balance sheet or the stock market data of a business. To calculate CFPS, simply divide CFO by the number of outstanding shares. For example, if a business has a CFO of $10 million and 5 million outstanding shares, its CFPS is $2.
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- Mohsin Ali Khan | Financial Service | IT Service | Financial Consultant | Remote Accounting | Bookkeeping Service | QuickBook SAP Xero | MBA | Business and Management | #Business #financialservice
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The cash flow per share ratio is a useful metric for valuing small businesses as it provides insights into the cash flow generated per share of stock. Here's how you can utilize this ratio in valuing a small business:Calculate the cash flow per share: Start by determining the total cash flow generated by the business over a specific period (usually a year) and divide it by the total number of outstanding shares. This will give you the cash flow per share ratio.Remember that while the cash flow per share ratio is a valuable tool, it should be considered alongside other financial metrics and qualitative factors when valuing a small business.
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- Christopher Brons Controller
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To calculate, divide operating cash flow by the number of outstanding shares. Higher CFPS indicates healthier cash generation. Use CFPS alongside other metrics for comprehensive business valuation or project assessment.
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It is a simple way to see how well a company turns its business activities into cash, measured per share. It’s helpful for comparing companies, but It only looks at cash from business operations, not other money matters like investments or loans.Sometimes the cash flow number might include unusual or one-time things, so it might not always be a reliable indicator.If a company buys back its shares or issues new ones, it can change the CFPS, but not necessarily because the company is doing better or worse.CFPS works best for comparing similar companies, not those in totally different businesses.It is one part of a bigger picture needs to be viewed with other parts before making a final decision.
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2 Interpreting CFPS
CFPS tells you how much cash a business or a project can distribute to its shareholders or reinvest in its growth. A high CFPS indicates that a business or a project is generating more cash than it needs to cover its expenses and obligations, and has the potential to increase its dividends, buy back its shares, or invest in new opportunities. A low CFPS indicates that a business or a project is struggling to generate enough cash to sustain its operations, and may have to borrow more, sell its assets, or cut its dividends. CFPS can also be compared with EPS to assess the quality of earnings. A higher CFPS than EPS suggests that a business or a project has strong cash flow and low non-cash expenses. A lower CFPS than EPS suggests that a business or a project has weak cash flow and high non-cash expenses.
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CFPS is like the financial crystal ball that reveals how much cash a business has at its disposal. A high CFPS is like a green light, signalling that the business is swimming in cash and has options—dividends, share buybacks, or exciting new investments. On the flip side, a low CFPS is a red flag, indicating that the business might be struggling to keep the cash flowing and might need to tighten its financial belt. CFPS and EPS are two ways to measure a company's earnings. Comparing them can reveal how much cash a company generates from its operations. A higher CFPS than EPS means the company has a strong cash position. A lower CFPS than EPS requires further investigation to find out what is affecting the company's cash situation.
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- Christopher Brons Controller
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Interpret CFPS by assessing its trend and comparing it to industry peers. Rising CFPS suggests robust cash generation, signaling financial strength. Conversely, declining CFPS may indicate cash flow challenges. A high CFPS relative to competitors implies efficiency. However, consider other factors for a comprehensive analysis, such as debt levels and market conditions.
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- Sahil Luthra Personal Finance Simplified, Like It Should Be | Co-Founder @ WiseUp Wealth Builders | Finance Educator | Investment Advisor
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CFPS shows how much cash a business can give to shareholders or use for growth. High CFPS means more cash for dividends or investments. Low CFPS suggests struggles, needing more borrowing or maybe cutting dividends.Comparing CFPS with EPS helps check earnings' quality. Higher CFPS than EPS means strong cash flow, while lower CFPS suggests weak cash flow.
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3 Using CFPS to value a business or a project
One way to use CFPS to value a business or a project is to apply a multiple to it, based on the industry average, the growth rate, the risk, and the expected return. A multiple is a factor that reflects how much investors are willing to pay for each unit of cash flow. For example, if the average multiple for a certain industry is 15, it means that investors are willing to pay $15 for every $1 of cash flow. To value a business or a project using CFPS and a multiple, simply multiply the CFPS by the multiple. For example, if a business has a CFPS of $2 and a multiple of 15, its value is $30 per share.
Another way to use CFPS to value a business or a project is to discount its future cash flows to the present value, using a discount rate that reflects the required return and the risk. This method is called the discounted cash flow (DCF) model. To use the DCF model, you need to estimate the future CFPS for a certain period, usually five to ten years, and a terminal value that represents the value of the business or project beyond that period. Then, you need to discount these values to the present value, using a discount rate that reflects the opportunity cost of investing in the business or project. The sum of these present values is the value of the business or project. For example, if a project has a CFPS of $2 in year 1, growing at 10% per year for five years, and a terminal value of $50, and the discount rate is 12%, its value is $41.27.
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To value a business or project using CFPS, multiply the calculated CFPS by an appropriate valuation multiple. The multiple depends on industry standards, growth prospects, and risk factors. This provides an estimate of the company's intrinsic value. However, CFPS should be used in conjunction with other valuation methods for a more accurate and comprehensive assessment.
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4 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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A business may be be profitable but yet could have a negative cash flow due to higher receivables and/ or Inventory . One should be careful about such businesses as profit in the books can be deceptive.
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When using CFPS for valuation, consider the company's capital structure, debt levels, and sustainability of cash flows. Evaluate the industry's economic outlook, competitive landscape, and any potential regulatory impacts. Additionally, assess management quality, future growth prospects, and macroeconomic factors affecting cash flow. Combining CFPS with a holistic approach enhances the reliability of your business or project valuation.
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