If you're an investor, it's important to know how to calculate free cash flow per share. This metric tells you how much cash a company has available to pay dividends, perform share buybacks and invest in new projects. In this guide, we'll walk you through the steps of calculating free cash flow per share and explain why it matters for stockholders.
What is free cash flow per share, and why is it important to stock investors?
Free cash flow per share (FCFps) is a metric that tells you how much cash a company has available to pay dividends and invest in new projects. This metric is calculated based on the company's free cash flow and the number of shares outstanding. A company's free cash flow is critical because it measures the company's ability to generate cash flow from operations after accounting for capital expenditures.
This is important because it gives you an idea of the company's financial health and whether or not it can continue to pay out dividends, perform share buybacks and reinvest in itself. For example, companies with poor free cash flow may have to cut back on dividends or invest less in new growth initiatives, which can lead to a decline in the stock price. Whereas companies with strong free cash flow can increase dividend payments and invest in new successful projects, which can lead to an increase in the stock price.
How do you calculate free cash flow per share?
There are a few different ways to calculate free cash flow per share, but the most common method is to use the company's cash flow statement. To calculate free cash flow per share, you will need to take the company's net income, add back any non-cash items like depreciation and amortization, and subtract any capital expenditures. This will give you the company's free cash flow for the period.
Once you have the company's free cash flow, you will need to divide it by the number of shares outstanding. This will give you the free cash flow per share for the company.
Free cash flow per share formula
The free cash flow per share formula is simple:
FCFps = (Operating Income – Capital Expenditures) / Outstanding Shares
As you can see, the FCFps formula uses three main financial metrics: operating income, capital expenditures, and the number of shares outstanding. The first two financial metrics can be found on a company's cash flow statement, whereas the latter is typically found in the income statement.
Free cash flow per share calculation example
Let's take a look at an example to see how the free cash flow per share formula works in practice. In 2021 Apple Inc.'s operating income was $122.151 billion, capital expenditures were $10.708 billion, and outstanding shares were 16.215 billion.
Plugging these numbers into the free cash flow per share formula, we get:
FCFps = ($122.151 billion + – $10.708 billion) / 16.215 billion
FCFps = $6.87
This means that for every share of Apple Inc. that you own, the company has $6.87 in cash available to pay dividends, do share buybacks and invest in new initiatives.
Automatic free cash flow per share calculation in Excel and Google Sheets
Instead of calculating this metric manually for every company you analyze, you can use a tool like Wisesheets to automatically get this number on your spreadsheet.
Using the WISE function like this:
=WISE("ticker", "free cash flow per share", "period/s")
You can get this number for hundreds of companies instantly
Now that we know how to calculate FCFps let's look at the different periods this metric can be calculated.
Free cash flow per share periods
Free cash flow per share can be calculated for any period of time. However, it's most commonly calculated on an annual or quarterly basis. This is because it can be challenging to compare across different time periods. For example, a company may have a high FCFps in one quarter but a low FCFps in another quarter due to seasonality.
The formula and calculation remain the same; however, regardless of the period, the only thing that changes is the reported company financials.
Luckily with Wisesheets, you can easily get the numbers for any time period you want by simply changing the period in the function.
As you can see, you can get the free cash flow per share for stocks annually, quarterly, or on a ttm basis. The latter is essentially the sum of the company's free cash flow for the past 4 quarters. This is an important period for comparing companies recent financial performance across their unique fiscal years.
Free cash flow per share limitations
One of the limitations of free cash flow per share is that it only tells you how much cash a company has available on a per-share basis. It doesn't tell you how the company is using that cash or what the company's plans are for future growth.
Another limitation is that it only looks at one period of time. This can help determine if a company is in a good financial position at the moment. Still, it doesn't give you any insight into how the company has been performing over time unless you calculate it for multiple periods.
Finally, it doesn't take into account the company's debt. This is important because a company with a free cash flow could be using all that cash to pay the debt as opposed to other initiatives that may generate a greater return on capital.
Despite these limitations, free cash flow per share is still a valuable metric to use when analyzing companies. It can help you determine if a company is in a good financial position, and it can give you some insight into how the company has been performing over time.
When used alongside other financial metrics, FCFps can give you a well-rounded view of a company's financial health.
How might FCPs be affected by changing economic conditions or other external factors?
The free cash flow per share metric is affected by many internal and external factors.
Some of the internal factors include a company's operating expenses, capital expenditures, and working capital requirements. Changes in any of these factors can directly impact a company's free cash flow.
Some of the most important external factors are changes in the economy, changes in interest rates, and competition.
Changes in the economy can affect a company's ability to generate revenue and profit. For example, with a more favorable or unfavorable economic outlook, demand for the company's product or services may rise or fall, impacting cash flow.
Changes in interest rates can affect a company's ability to borrow money and invest in new initiatives. For example, high-interest rates can make it more expensive for a company to borrow money, leading to less cash available for reinvestment and growth. In contrast, lower interest rates can have the opposite effect.
Finally, competition is another external factor impacting a company's free cash flow. If a company's competitors are expanding and investing in new products or technologies, the company may need to do the same in order to stay competitive. This can lead to an increase in a company's capital expenditures, reducing its free cash flow.
All of these factors can have a significant impact on a company's free cash flow per share.
In conclusion, free cash flow per share is a valuable metric that can help you assess a company's financial health. However, it is affected by many different factors, both internal and external, so it's important to keep all of these factors in mind when analyzing a company's FCFps.
When used alongside other financial metrics, free cash flow per share can give you a well-rounded view of a company's financial health.
By understanding how to calculate FCFps and what factors can affect it, you'll be able to make more informed investment decisions.
To your investment success!