Free Cash Flow Per Share

Free Cash Flow Per Share is a financial metric that shows how much cash a company generates for each single share of its stock. Think of it as the company's “real” profit per share. While Earnings Per Share (EPS) gets a lot of headlines, it's based on Accrual Accounting rules and can include non-cash items, making it easier to massage. Free Cash Flow (FCF), on the other hand, is the hard, cold cash left over after a company pays for its operating expenses and Capital Expenditures—the investments needed to maintain and grow its business. Dividing this total FCF by the number of Shares Outstanding gives you Free Cash Flow Per Share. For value investors, this number is gold because it reveals a company's true ability to generate cash that can be used to reward shareholders through Dividends and buybacks, pay down debt, or reinvest for future growth.

In the world of investing, there's an old saying: “Revenue is vanity, profit is sanity, but cash is reality.” This perfectly captures why Free Cash Flow Per Share is often a more reliable indicator of a company's health than the more popular EPS. A company's reported Net Income (the 'E' in EPS) can be a bit of a mirage. It's calculated using accounting rules that allow for non-cash expenses like Depreciation and Amortization. A company can also make aggressive accounting choices that inflate its reported profits without a corresponding increase in actual cash. This can paint a misleadingly rosy picture. FCF/Share cuts through the accounting fog. It focuses on the actual cash flowing in and out of the business. A company can report fantastic earnings, but if it isn't generating positive free cash flow, it might be in trouble. It could be burning through its cash reserves or taking on debt just to stay afloat. A consistently high and growing FCF/Share, however, is a strong sign of a durable, profitable business that isn't just surviving, but thriving. It's the financial equivalent of a strong pulse.

Calculating FCF/Share is straightforward. You just need to pull a couple of numbers from a company's financial statements.

The basic formula is simple: Free Cash Flow Per Share = Free Cash Flow / Diluted Shares Outstanding

Let's break down where to find these numbers.

1. Step 1: Find the Free Cash Flow (FCF). The most common way to calculate FCF is by taking the cash a company generates from its core business and subtracting the money it spends on big-ticket items. You can find these figures on the Cash Flow Statement:
   • FCF = Cash Flow from Operations - Capital Expenditures
2. Step 2: Find the Diluted Shares Outstanding. Don't just use the basic share count. Diluted shares provide a more conservative and realistic picture because they include potential shares that could be created from things like Stock Options or Convertible Debt. You can usually find this number on the company's Income Statement (near the EPS calculation) or on the front page of its annual 10-K report.
3. Step 3: Divide. Simply divide your FCF from Step 1 by the diluted shares from Step 2. Voilà! You have your Free Cash Flow Per Share.

Okay, you've calculated the number. Now what? FCF/Share is a powerful tool for both valuation and assessing business quality.

Just as the P/E Ratio relates a company's price to its earnings, you can relate a company's price to its free cash flow. A high FCF/Share relative to the stock price can indicate that the stock is undervalued. For example, if Company A trades at $50 per share and has an FCF/Share of $5, its Price to Free Cash Flow (P/FCF) ratio is 10 ($50 / $5). If a similar Company B also trades at $50 but has an FCF/Share of only $2, its P/FCF is 25. All else being equal, Company A looks like a much better bargain, as you're paying less for each dollar of cash flow it generates.

A company's track record of FCF/Share tells a story about its quality and management's skill.

• Consistency is Key: A business that consistently generates strong and, ideally, growing FCF/Share over many years likely has a durable competitive advantage.
• Financial Flexibility: Positive FCF gives management options. They can reinvest in the business, pay down debt, or return cash to shareholders. A company that can fund its own growth without constantly asking investors for more money is a high-quality machine.

While FCF/Share is a fantastic metric, it's not foolproof.

• It Can Be Lumpy: FCF can be volatile from year to year. A company might make a huge one-time investment (a new factory, a major acquisition), which would depress FCF in that single year but could lead to much higher cash flow in the future. Always look at the trend over at least 5-10 years, not just a single period.
• Industry Matters: Comparing the FCF/Share of a software company to that of a heavy industrial manufacturer is an apples-to-oranges comparison. Their capital needs are vastly different. Always compare companies within the same industry.

Ultimately, Free Cash Flow Per Share is a cornerstone metric for any serious value investor. It helps you look past the accounting noise and focus on what truly matters: the ability of a business to generate cold, hard cash.