How to Calculate Operating Cash Flow Per Share

How to Calculate Operating Cash Flow Per Share
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Few analysts or investors anticipated the 2002 Enron debacle. This disaster was the first of a series of major corporate accounting scandals that allowed average Americans to recognize the problems with corporate governance. The disintegration of Enron, Lehman Brothers and Worldcom allowed Joe Public to recognize the risks investors assume when placing their faith and fortunes in the hands of Wall Street analysts alone.

Today, industry experts, government entities and watchdog groups urge investors and business leaders alike to maintain a sharp focus on the cash a company generates and, more importantly, that which its leaders put to use. Both are inextricably linked to company growth, the partnerships that underscore operational success and, ultimately, shareholder earnings. Little wonder that operating cash flow is foremost in the minds of business leaders.

What Is Operating Cash Flow (OCF)?

Operating cash flow (OCF) is the first financial conclusion that's depicted on a cash flow statement. OCF is a measure of the cash a company's operations generate. As such, OCF reflects a company's ability to produce the positive cash flow it requires to maintain and grow a company's operations.

What Is the Importance of Operating Cash Flow?

Though operating cash flow – cash flow from operating activities – does not directly affect a company's revenues or expenses, it's a reflection of the well-being of a company because materials and equipment must be purchased and employee salaries must be paid. Even so, time is required to realize the return on these expenses through increased revenues, decreased expenses and asset depreciation. In fact, cash recovery can take months – even years – so companies may wind up cash poor for both the short- and long-term.

If the cash flow falls short, company leadership may be forced to seek external financing for materials purchases, employee salaries, equipment purchases and debt repayments. It's essential, therefore, for leaders to keep an eye on operating cash flow.

The Statement of Cash Flows

The statement of cash flows maintains an operational focus so it informs the reader as to management's ability to maintain the business in an efficient, effective and most economical fashion. The reader analyzes the statement to identify areas in need of improvement to maximize cash inflows and minimize cash outflows.

The cash inflows and outflows that appear in the statement of cash flows are each a result of the organization's primary business activities, such as manufacturing and the provision of services, sales of products and services, billing and accounts receivable and collections, raw goods and finished goods, purchasing, accounts payable and payments, and human resources. Therefore, the statement's focus is the organization's use of cash considering its source and the organization's policies and procedures to deal with over- and under-cash situations.

Operating Cash Flow Per Share

Operating cash flow per share, or cash earnings per share, equals operating cash flow divided by the number of shares outstanding, where operating cash flow equals non-cash transactions plus net income. Unlike earnings per share (EPS), which measures the amount of a company’s profit that's allocated to each share of stock, operating cash flow per share measures the cash flow that can be allocated to each share of stock.

The greater the operating cash flow per share, the better the company's financial performance and the greater its ability to generate cash flow. Operating cash flow per share is a means to compare one company's operating performance to that of its peers or to a prior period's results.