Francis' Key Takeaways:
- "Cash per share" is a metric in financial accounting that represents the amount of cash a company has per share.
- Commonly used to assess financial health, CPS demonstrates the ability to meet short-term obligations and cash growth over a period of time, calculated as: Total Cash / No. of Shares = Cash Per Share.
- An increase in CPS can be achieved by:
- Efficiency in working capital management
- Cost reduction strategies
- Changes in dividend policies to retain more cash in the business
In the jargon-filled world of business finance and accounting, understanding valuation metrics of a company is crucial for investors, financial analysts, and enthusiasts alike. One such metric that provides a clear look into the financial health of companies and businesses is Cash Per Share (CPS). This article aims to explain exactly what CPS is, its importance, how it's calculated, and what role it can play when making informed business decisions.
What is Cash Per Share?
Cash Per Share is a financial metric that measures the amount of cash and cash equivalents that a company has available on a per-share basis. It's an indicator of a company's financial health, strength, and liquidity.
CPS can provide insights into the funds that are readily available to the company without requiring asset sales, additional financing, or generating new revenue.
Why is Cash Per Share Important?
As a financial metric, Cash Per Share is significant for several reasons:
- Liquidity Analysis: It helps in evaluating a company's ability to cover short-term liabilities and emergencies with the cash currently available.
- Investment Decisions: Investors often look at Cash Per Share to determine whether a company is undervalued or overvalued. A higher CPS can indicate that the company has enough liquidity to support growth, pay dividends, buy back shares, or reduce debt.
- Comparative Analysis: Comparing CPS from different companies within the same industry can provide valuable insights into which companies are more financially stable and potentially a "safer" investment.
How to Calculate Cash Per Share
Calculating Cash Per Share involves a simple formula: Cash Per Share = Total Cash / Total No. of Shares = Cash Per Share
Where:
- Total Cash - Total cash (and cash equivalents) are found on the company’s balance sheet and include physical currency, bank accounts, and short-term investments that can be quickly converted to cash.
- Total No. of Shares - Total Number of Shares refers to all shares currently owned by shareholders, company officials, and investors in the public domain.
Example Calculation
For example, let's consider a hypothetical UK-based company, BritFin PLC, with £500 million in cash (and cash equivalents) and 250 million shares outstanding. The Cash Per Share would be calculated as follows:
Cash Per Share = 250,000,000 / £500,000,000 = £2.00
This means that for every share of BritFin PLC, there is £2.00 in liquid cash available.
The Role of Cash Per Share in Financial Analysis
In the context of financial analysis, Cash Per Share serves multiple purposes:
- Valuation Metric: CPS is used by investors to gauge if a company’s stock is trading at a fair price relative to its cash reserves.
- Financial Health: Analysts use CPS to evaluate a company's ability to remain solvent in tough economic times or to finance its operations without external funding.
- Benchmarking Tool: Cash Per Share allows for benchmarking companies against industry or sector peers to identify industry leaders in terms of liquidity.
Conclusion
Cash Per Share (CPS) is an important financial metric that provides valuable insights into a company's overall financial health and performance. For stakeholders, understanding and using this metric can lead to more informed decision-making and strategic planning.
