Cash earnings per share is a measure of a company’s financial performance calculated by dividing operating cash flow by the number of fully diluted shares. It is a more objective measure than basic earnings per share, as it is less influenced by subjective judgments and accounting policies. Non-cash items such as depreciation and amortization are included in the calculation. The measure is useful for comparing a company’s performance against its competitors or its own performance in 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 business generates from its operations during an accounting period, or 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 typically use fully diluted shares, or the number of shares that could be held if instruments such as options and warrants were 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.
In order to arrive at the cash figure that arises from business operations, it is necessary to include non-cash items in profit. The primary non-monetary items are likely to be depreciation of fixed assets, amortization of leases or goodwill, and deductions for impairment of assets. Inclusion of these items in the operating earnings figure provides a net cash earnings figure.
Cash earnings per share is a measure using fully diluted earnings per share. The figure includes shares held by investors at the time the calculation is made, as well as the total number of shares that would be held by investors if all investors with warrants or options to purchase shares or convert their holding into shares were to exercise this right. The fully diluted earnings per share figure is used because it is a more conservative measure of the earnings potentially available to shareholders.
It is useful to know the cash earnings per share, because the amount of cash generated in an accounting period is not as dependent on subjective judgment as the amount of earnings is. Profit for a period may depend on the company’s capital structure, depreciation policy, intangible asset amortization policy, and asset lease or purchase decisions. The cash generated figure is more independent of these judgments and accounting policies. As with all accounting and financial ratios, the cash earnings per share number is most useful when used to compare a company’s performance against its competitors in the same industry, or to compare a company’s performance in two industries. different periods. Investors making this type of comparison should ensure that they are comparing the same ratio in each company, as different measures of earnings per share are calculated in different ways.
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