 Personal Finance PowerPoint Presentation, Cash Earnings Per Share, Cash EPS. Prepare to get financially fed by practicing personal finance. Most of this information comes from Investopedia, Cash Earnings Per Share, Cash EPS, which you can find online. Take a look at the references, resources, continue your research from there. This by Will Kenton updated June 30th, 2021. In prior presentations, we've been looking at investment goals, investment strategies, investment tools, keeping in mind the two major categories of investments. That being fixed income, typically bonds and equities, typically the common stock. Also, keep in mind your investment strategies and the tools that you are using. For example, if you're saving for retirement, you might be using tools such as mutual funds and ETFs, which help you to diversify your portfolio through kind of a pooling component or mechanism, which means that you might be trying to measure the performance of the market or certain sectors, possibly looking at indexes, for example, as opposed to singular stocks. If you're trading singular stocks, then you're going to be drilling down onto financial statements and doing more ratio analysis, most likely, and that's where you might be using more likely the cash earnings per share, which we'll talk about now. Cash earnings per share, cash EPS, or more commonly called operating cash flow, is a financial performance measure comparing cash flow to the number of shares outstanding. Cash EPS earnings per share differs from the more popular net profit measure earnings per share, which compares net income on a per share basis. So the financial statements are in essence not on a cash basis, they're on an accrual basis when the revenue was earned, when expenses were incurred. So when we look at the performance statement, that being the income statement, the bottom line of it is revenue minus expenses and it's on basically an accrual basis. So we might want to also look at it in essence on a cash basis and compare it to the number of shares outstanding. So free of non-cash components such as depreciation, which is included in profit based EPS earnings per share measures, cash earnings per share may prove a more reliable gauge of financial and operational health. So notice that the accrual method includes some things as expenses such as depreciation that are not cash related. In other words, depreciation could be a big number depending on the type of company that we're looking at and the concept of depreciation is that we bought a big piece of equipment for example and even if we paid cash for it, we don't want to expense it because if we bought like a million, like a hundred thousand office building, hundred thousand dollar office building, if we just wrote it off in the year that we purchased it, it would look like a really big expense and it's not really an expense from an accrual standpoint because we're going to be using that office building for many years into the future. And so from the accrual standpoint, from a matching standpoint, we should depreciate it allocating the cost over the useful life. However, although that depreciation makes sense for many kind of decision making processes, it distorts the cash flow component. So if you wanted to do a cash flow basis, one of the major things you would remove is the expense of depreciation. So the higher a company's cash earnings per share, the better it is considered to have performed over a period. A company's cash earnings per share can be used to draw comparisons to other companies of trends in a company's business. So clearly once we have the earnings per share, we can use that to gauge what other companies are doing and then use it to see whether the value of the stock price is looking good or bad in comparison. So cash earnings per share, we got the operating cash flow, which in essence that's where the net income would be if it was just earnings per share. So you might take net income and try to modify it to be more of a cash flow kind of component. One of the major modifications being that we could take out the depreciation or you might get it from like a cash flow statement. So divided by the diluted shares outstanding. So notice we got the shares outstanding, meaning the shares representing unit ownership in standardized units. So we can break this information down into standardized units. Understanding cash earnings per share. When analyzing a company, a standard financial analysis technique compares cash flow from operations, CEPs to reported net income. A common warning sign for aggressive revenue recognition often surfaces when operating cash flows starts to lag behind reported net income materially. So we might then be comparing then and think about okay, what's the net income being reported and what's the cash flow. You would think over time because these are just timing differences. The difference between a cash method and an accrual method is a timing difference. So you would think that the two would kind of wash out or even out basically over time or as time passes. But if there's a consistent difference between the revenue being higher on an accrual basis than the cash flow basis, then you might suspect that there's something funny going on with regards to the reporting to make the company look artificially high on the revenue side. So when this happens, it may be a red flag for recognizing revenue too soon. So being rather susceptible to accounting manipulation, basic earnings per share can be an unreliable measure of performance. Now, of course, hopefully we've got rules in place with regards to the accrual method and audits that are in place so that the financial statements are representing fairly what revenue is. But still you could try to do some stuff with regards to the timing of when revenue is going to be recognized in an attempt to basically window-dressed in an attempt to possibly make revenue higher than it otherwise would be, for example. So as such, when evaluating a potential investment, investors such as Warren Buffett prefer cash-based measures to guide their analysis. So more recently, stock buybacks rather than stock dividends have been an overwhelming popular method to return profits to shareholders. An argument can be made. This helps increase earnings per share by reducing shares outstanding, thereby helping corporate executives gain earnings per share growth to juice performance-based compensation plans. So in other words, many people, of course, are reliant on the earnings per share calculation. So we're going to be suspect of a company that's trying to look better artificially, and they might try to do that by buying back stocks, and that would reduce the number of stocks that are outstanding. And that means that the denominator would be going down, which would increase the normal earnings per share calculation, which, if the company was trying to do this in kind of a deceptive way or a manipulative way, they might be doing that in order just simply to increase the earnings per share, which they would hope that people would perceive as actual increases in value of the stock. So being a more conservative measure of performance, the cash earnings per share can eliminate some of these issues common to the greater use of financial engineering. Benefits of using cash earnings per share. Cash earnings per share is less prone to accounting manipulation, which offers a clearer picture of cash flow in real earnings. So it's kind of interesting because notice that one of the reasons that we're on an accrual basis method as opposed to a cash basis method is because the accrual basis method actually is harder to game the system than a cash basis method in some ways. Because if you are on a cash basis method, what you would do to manipulate income is just manipulate the cash flow, meaning all you'd have to do is say, okay, if you pay me before year end in December, even though we're going to be doing the work next year, then we'll be able to increase the revenue, for example, or if I delay the expenses that I'm going to pay till the following year or something like that, you could just adjust that. So the accrual method actually is designed to reduce the manipulation like that. But now that we're on the accrual basis method, people are going to try to look as good as they can on the accrual basis method, which means they might use whatever strategies they can within the rules of accrual basis method to try to manipulate revenue to be as high as possible in any given period. So then if you compare it to the cash basis methods, you might be able to see a more realistic number in those cases if that were to take place. Added transparency is a sign of good corporate governance. So CEPS, the Cash Earnings Per Share, shows investors on a per share basis how much profit each share generates. This helps identify incremental value. Cash earnings per share is not subject to the same short term market focus seen with earnings per share.