Free Cash Flow Per Share (FCFPS): What Is It, Calculation, Importance & More

Free Cash Flow Per Share (FCFPS) is a financial metric that measures the amount of free cash flow a company generates on a per-share basis. It provides investors with insight into how much cash is available after covering capital expenditures and operating expenses, which could be used for dividends, share buybacks, or debt repayment. This metric is crucial for evaluating a company’s financial flexibility and efficiency in generating cash relative to its outstanding shares.

The formula to calculate Free Cash Flow Per Share is:

FCFPS = Free Cash Flow / Total Outstanding Shares

In this formula,

• Free Cash Flow (FCF) = Operating Cash Flow – Capital Expenditures
• Total Outstanding Shares refers to the number of shares currently held by shareholders, excluding treasury stock.

For a more detailed understanding:

• Obtain the operating cash flow from the cash flow statement.
• Subtract the capital expenditures, found under the investing activities section.
• Divide the result by the total number of shares outstanding, listed in the equity section of the balance sheet.

Consider that a ABC Inc., reports the following data for a financial year:

• Operating Cash Flow: $800 million
• Capital Expenditures (CapEx): $300 million
• Total Outstanding Shares: 200 million

The formula for Free Cash Flow is:

Free Cash Flow (FCF) = Operating Cash Flow – Capital Expenditures

For ABC Corporation:

FCF = $800 million – $300 million = $500 million

ABC Corporation has $500 million in free cash flow after accounting for necessary expenditures to maintain or expand its operations.

Now, determining Free Cash Flow Per Share (FCFPS)

The formula for Free Cash Flow Per Share is:

FCFPS = Free Cash Flow ÷ Total Outstanding Shares

For ABC Corporation:

FCFPS = $500 million ÷ 200 million shares = $2.50 per share

This means that for each share owned, the company generates $2.50 of free cash flow.

A Free Cash Flow Per Share of $2.50 indicates that ABC Corporation generates $2.50 of available cash for each outstanding share. This cash can be used for dividends, stock buybacks, or reinvestment in the company.

Free Cash Flow Per Share (FCFPS) is a vital financial metric that helps investors, analysts, and companies gauge the efficiency of cash generation in relation to outstanding shares. This metric sheds light on a company’s financial flexibility, operational health, and its potential to deliver shareholder value.

By dividing free cash flow by the number of outstanding shares, FCFPS standardizes cash flow generation, making it easier to compare companies across industries or sizes. It’s particularly valuable for long-term investors looking for stable companies with strong cash flow fundamentals.

Below, we explore the key reasons why FCFPS holds such significance.

FCFPS highlights how effectively a company manages its cash flow and capital expenditures. A higher FCFPS often indicates strong profitability and prudent financial management.

Companies with consistent or growing FCFPS are attractive to long-term investors, as they have surplus cash to reward shareholders through dividends or stock buybacks.

By presenting free cash flow on a per-share basis, FCFPS allows for meaningful comparisons between companies of different sizes or within the same industry.

FCFPS helps assess whether a company’s dividend payments or investment strategies are sustainable without incurring excessive debt.

Unlike net income, free cash flow is harder to manipulate, offering a more transparent view of a company’s operations.

Interpreting FCFPS depends on the context:

• High FCFPS: Indicates robust cash generation. Companies with high FCFPS are often well-positioned to fund growth, reduce debt, or return value to shareholders.
• Low or Negative FCFPS: May indicate challenges in managing cash flow, high capital expenditures, or declining operating performance. However, for growth companies investing heavily in expansion, low FCFPS may not be a red flag.
• Trend Analysis: A rising FCFPS over time signals improving financial health and operational efficiency, while a declining trend could indicate underlying financial issues.

Comparisons should consider industry norms, as some sectors naturally operate with higher or lower free cash flow margins.

There’s no universal benchmark for what constitutes a “good” FCFPS, as it varies by industry and company size. However, the following guidelines can help:

• Positive FCFPS: Generally, any positive value is a sign of financial stability, especially when consistently maintained or growing over time.
• Above Industry Average: A company with an FCFPS higher than its peers indicates superior operational efficiency and cash generation.
• Aligned with Dividends: FCFPS should at least cover the company’s dividend payouts to ensure sustainability.

For example, tech companies may have lower FCFPS during growth phases but eventually exhibit higher figures as they mature. On the other hand, established companies in consumer staples often maintain steady FCFPS to support regular dividends.

While Free Cash Flow Per Share (FCFPS) is a valuable financial metric, it does come with certain limitations that investors should be aware of when analyzing a company’s financial health. Understanding these limitations ensures that FCFPS is used in the right context and alongside other financial indicators for a more comprehensive analysis.

In sectors like utilities or manufacturing, where capital expenditures are inherently high, FCFPS might undervalue a company’s true profitability.

Free cash flow can fluctuate significantly due to one-time expenses or seasonal variations, potentially distorting FCFPS calculations.

Different accounting practices for reporting cash flow or capital expenditures can lead to inconsistencies in FCFPS comparisons.

FCFPS focuses on historical cash flow and does not account for potential future earnings growth, which might undervalue high-growth companies.

FCFPS should not be analyzed in isolation. Factors like debt levels, industry benchmarks, and overall financial performance must also be considered for a complete picture.

InvestingPro offers detailed insights into companies’ Free Cash Flow Per Share (FCFPS) including sector benchmarks and competitor analysis.

A negative FCFPS typically means that a company is spending more on capital expenditures than it is generating in operating cash flow. This situation may arise during periods of heavy investment in growth, expansion, or during financial distress.

FCFPS is usually calculated on a quarterly or annual basis, in line with a company’s financial reporting schedule. Regular calculations provide insights into how efficiently a company is generating free cash flow over time.

No, FCFPS and EPS are different metrics. EPS is based on net income and includes non-cash items like depreciation, while FCFPS focuses on actual cash generation after capital expenditures, offering a clearer view of financial health.

While harder to manipulate than net income, FCFPS can still be affected by management’s decisions regarding capital expenditures, operating cash flow reporting, or the timing of cash inflows and outflows, which may distort its true picture.

FCFPS is a key metric for dividend investors as it indicates a company’s ability to generate cash after necessary investments. A healthy FCFPS suggests that the company can sustain or grow its dividend payouts over time.