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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Per Share Basis

What it is:

Per share basis is a carefully scrutinized metric that is often used as a barometer to gauge a company's profitability per unit of shareholder ownership. In many cases, cash flow per share is one of the most important measures. After all, net income can be easily manipulated due to different applications of accounting rules, accounting changes, and restatements, but cash flow is a little harder to manipulate.
 

How it works (Example):

For example, cash flow per share represents the portion of a company's cash flow that is allocated to each share of common stock. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

The formula for cash flow per share is:

Cash Flow Per Share = (Cash Flow - Preferred Dividends)/Shares Outstanding

Let's assume that during the fourth quarter, Company XYZ reported cash flow of $4 million and preferred dividends of $500,000. This is higher than the third quarter, when Company XYZ reported cash flow of $3 million and preferred dividends of $100,000.

Now, an increase in cash flow seems like a good thing. But when you look at the information on a per share basis, the conclusion changes a little. You see, during the third quarter, the company had a total of 8 million shares outstanding; this increased to 10 million shares outstanding. So for the third quarter, the cash flow was $2,900,000 and the cash flow per share was:

$2,900,000/8 million shares = $0.3625

In the fourth quarter, the cash flow per share was:
$3,500,000/10 million shares = $0.35

As you can see, the company generated more cash in the fourth quarter, but on a per share basis, it actually made less per share.

It is important to note that "cash flow" can come from several measures (EBITDA, free cash flow, cash from operations, etc.), and thus it is best for analysts and investors to understand which measure is going into the cash flow per share calculation.

Why it Matters:

Per share basis is a measure of a company's financial performance per share outstanding.