The Tech Stock Investor

Selecting stocks for potential investment is never an easy task. There are almost as many ways to measure stocks as there are stocks. One popular way to measure a company’s earnings potential is to look at its Cash Flow Per Share. First, we will show how to measure the Cash Flow Per Share (CFPS):

CFPS = Operating Cash Flow / Common Shares Outstanding

This is the quickest and simplest way to measure CFPS. Some will argue that manipulating this value is easy for company management to do, but if the measurement is taken in context to the stock and other stocks in its sector, any manipulation should be fairly transparent and easy to spot.

We want to focus on cash flow from operations because standard cash flow on a statement takes into account several other things which could be manipulated and we want to know the cash being generated from the company operations, not from investing and financing activities. Investing and financing is a common tool used by management to put spare cash to good use. When those activities inflate the CFPS figure, investors can mistakenly believe the company is making sales when it may actually have declining sales at that time period.

Why do we measure CFPS? We want to be sure a company can cover its obligations. A rising CFPS from year to year coupled with a rising EPS figure is a good sign a stock is heading in the right direction. Conversely, if EPS is rising and EPS is stagnating, investors should be asking questions.