Cash earnings per share is a measure of a company’s financial performance that uses operating cash flow divided by fully diluted shares. It includes non-cash items in profit and is more objective than basic earnings per share. It is useful for comparing a company’s performance against competitors or over different periods.
A company’s financial performance can be measured by looking at what is known as cash earnings per share. This calculates the cash the firm generates from its operations during an accounting period or the operating cash flow. To get cash earnings per share, operating cash flow is divided by the number of shares in the company. This measure would normally use fully diluted shares, which is the number of shares that could be held if instruments such as options and warrants are converted into shares by their holders. Cash earnings per share is different from basic earnings per share because the former uses cash flow as a measure rather than profit.
To arrive at the figure for cash from business operations, it is necessary to include non-cash items in profit. The primary non-cash items are likely to be depreciation of fixed assets, depreciation of leases or goodwill, and deductions for deterioration of assets. Including these items in the operating income figure provides a net cash earnings figure.
Cash earnings per share is a measure that uses fully diluted earnings per share. The figure includes the shares held by investors at the time of the calculation, as well as the total number of shares that would be in the hands of investors if all investors holding warrants or options to buy shares or convert their holdings into shares were to exercise this right. Fully diluted earnings per share is used because it is a more conservative measure of earnings potentially available to shareholders.
It is useful to know the cash earnings per share, because the cash generated figure in an accounting period is not as dependent on subjective judgments as the earnings figure. Earnings for a period may depend on the company’s capital structure, depreciation policy, intangible asset depreciation policy, and decisions regarding the leasing or purchase of assets. The figure for cash generated is more independent of these judgments and accounting policies. As with all accounting and financial reporting, cash earnings per share is very useful when used to compare the performance of a firm against its competitors in the same industry or to compare the performance of a firm in two different periods. Investors doing this type of comparison should make sure they are comparing the same ratio across each company, as different earnings per share are calculated in different ways.
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