What is Free Cash Flow per Share?
Free cash flow per share is a measure of how much cash per share a business generates after accounting for capital expenditures like equipment or buildings. Free cash flow is available to be used for expansion, dividends, debt reduction, or other purposes.
How Does Free Cash Flow per Share Work?
The formula to calculate free cash flow per share is:
For example, let's assume Company ABC's Statement of Cash Flows shows operating cash flow of $150,000. It also shows capital expenditures of $50,000 for the purchase of a new building. This means Company ABC has a free cash flow of $100,000.
Next, we find the number of shares outstanding in Company ABC's Annual Report to be 10,000 shares.
Using this information, we can solve for free cash flow per share:
Free Cash Flow Per Share = $100,000 / 10,000 outstanding shares = $10 per share
Why Does Free Cash Flow per Share Matter?
Analysts value free cash flow more than just about any other measure out there, including earnings per share. Cash helps companies expand, develop new products, buy back stock, pay dividends, or reduce debt. Many analysts look to free cash flow for insight into the core of a company's cash-generating engine.
Almost all cash flow measures are influenced heavily by the state of a company's cash from operations, which in turn is heavily influenced by a company's net income. Thus, higher revenues, lower overhead, and more efficiency are big drivers of cash flow from operating activities. For these reasons, investors often hunt for companies that have high or improving free cash flow but low share prices -- the disparity often means the share price will soon increase.