What is Free Cash Flow Per Share?
Free cash flow (FCF) is the money a company has left over after paying for its operating and capital expenses. Think of it as the pocket money you have after covering all your bills. When we talk about free cash flow per share, we take that leftover money and divide it by the number of shares outstanding. This gives us an idea of how much cash flow each share is generating, providing a clearer picture of the value each owner holds.
Why is This Metric Important?
Free cash flow per share is crucial because it measures a company’s financial health and flexibility. Moreover, a business that consistently generates more cash flow than needed for its expenses is in a strong position. This surplus cash flow can be used in several ways that benefit shareholders:
- Paying Dividends: Companies with high free cash flow can afford to pay dividends to shareholders, providing a steady income stream.
- Stock Buybacks: Repurchasing shares can reduce the number of outstanding shares, increasing the value of remaining shares.
- Debt Reduction: Paying down debt improves the company’s financial stability, reducing interest expenses.
- Investment in Growth: Reinvesting free cash flow into the business can lead to future growth, driving long-term shareholder value.
For investors, steady growth of free cash flow per share is a signal of a company’s ability to generate cash beyond its immediate needs. It’s a sign of robust financial health and strategic growth potential.
Why is it Useful for Investors?
Investors can use free cash flow per share as a tool to identify undervalued companies and potential investment opportunities. Here’s why this metric is particularly useful:
- Identifying Value: When a company’s share price is low but its free cash flow is increasing, it may indicate that the earnings and share value are poised for growth.
- Assessing Financial Health: For the beginner investor, understanding a company’s FCF per share can provide insights into the financial stability. In addition, companies with strong and growing free cash flow are often better positioned to weather economic downturns and invest in future growth.
- Predicting Future Performance: By analyzing trends in free cash flow per share, investors can make more informed predictions about a company’s future performance. An upward trend in FCF per share suggests that the company is efficiently generating cash and managing its resources.
Real-World Example
Let’s consider a real company – Intuit. The company provides financial management and compliance products and services for consumers, small businesses, self-employed, and accounting professionals in the United States, Canada, and internationally. Intuit has been increasing free cash flow per share over the past 5 years. During this period this parameter has increased by 105% and stock price is up 143%. Here’s a simplified breakdown:
- Year 1: $8.3 per share
- Year 2: $8.7 per share
- Year 3: $11.6 per share
- Year 4: $13.1 per share
- Year 5: $17.0 per share
Notice that stock was down during 2022-2023 period. Due to ability of the company to generate steady and consistent free cash flow growth, the value investors were rewarded with 40% price jump for this past year.
Comparing Across Industries
Free cash flow per share can vary significantly across different industries. For instance, tech companies might have higher capital expenditures due to the need for constant innovation and development. On the other hand, a service-based company might have lower upfront expenses. By comparing FCF per share within the same industry provides a more accurate assessment.
Conclusion
Free cash flow per share is a vital metric for evaluating a company’s financial health and investment potential. By understanding and analyzing this metric, you can make more informed decisions and identify promising investment opportunities. However, it is important to look at the full picture and take into account other indicators of company’s development.
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