Investment Analysis

Cash EPS

Step-by-Step Guide to Understanding Cash Earnings Per Share (EPS)

Last Updated July 18, 2024

What is Cash EPS?

The Cash EPS is a non-GAAP profitability ratio that compares a company’s operating cash flow (OCF) to its diluted weighted average number of shares outstanding.

Cash EPS

Table of Contents

How to Calculate Cash EPS
Cash EPS Formula
Traditional EPS vs. Cash EPS: What is the Difference?
Adjusted Cash EPS Formula
Cash EPS Calculator — Excel Template
Cash EPS Calculation Example

How to Calculate Cash EPS

Cash earnings per share, or “cash EPS”, is a non-GAAP measure of profitability that compares a company’s operating cash flow (OCF) to its diluted share count on a weighted average basis.

Operating Cash Flow (OCF) → The operating cash flow metric represents the net cash generated from the operating activities of a business in a given period.
Diluted Shares Outstanding → The diluted share count of a company refers to the total number of outstanding common shares available to be traded in the open markets, net of any stock buybacks.

The cash earnings per share (EPS) of a company portrays its operating profits on a per-share basis, which is a cash flow metric adjusted for non-cash items and the change in net working capital (NWC).

The net income metric – i.e. the numerator in the traditional earnings per share (EPS) formula – is an imperfect measure of profitability because of the ease at which it can be distorted by non-cash items and earnings management tactics.

The more of a discrepancy there is between traditional EPS (GAAP) and cash EPS (non-GAAP), the greater the risk that the company’s accrual-based profitability might be artificially inflated.

On the other hand, the closer the traditional and cash EPS are, the more reliable the company’s GAAP-based profits are, i.e. there is a reduced risk of earnings management.

Since the operating cash flow (OCF) metric tracks the performance of a company across a period, the total diluted shares outstanding (which is calculated at a point in time) must be expressed on a weighted average basis.

The calculation of the cash EPS is a three-step process:

Step 1 ➝ Calculate Operating Cash Flow (OCF)
Step 2 ➝ Determine Diluted Weighted Average of Shares Outstanding
Step 3 ➝ Divide Operating Cash Flow (OCF) by Diluted Shares Outstanding

Cash EPS Formula

The formula to calculate the cash EPS is equal to operating cash flow (OCF) divided by the weighted average of diluted shares outstanding.

Cash EPS = Operating Cash Flow (OCF) ÷ Diluted Weighted Average of Shares Outstanding

The calculation of operating cash flow (OCF) starts with a company’s net income, i.e. its GAAP-based accounting profit.

The company’s net income, which flows in from the bottom of the income statement, is then adjusted for non-cash items (e.g. D&A) and the change in net working capital (NWC).

Operating Cash Flow (OCF) = Net Income + Depreciation and Amortization (D&A) + Change in Net Working Capital (NWC)

The usage of the weighted average share count is a compromise to fix the timing misalignment between the numerator and denominator.

Further, the number of shares outstanding should be calculated on a diluted basis, i.e. inclusive of the effects of potentially dilutive securities such as options, warrants and convertible debt.

Diluted Weighted Average Shares Outstanding = (Beginning + Ending Beginning Diluted Shares Outstanding) ÷ 2

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Traditional EPS vs. Cash EPS: What is the Difference?

The traditional earnings per share (EPS) metric is based on GAAP accounting standards and is a far more common measure of profitability in practice, namely due to the fact that it can be found on the income statement of public companies.

In the calculation of the traditional EPS metric under GAAP, the company’s net income (i.e. “bottom line”) is divided by its weighted average diluted share count.

Earnings Per Share (EPS) = Net Income ÷ Weighted Average Diluted Shares Outstanding

Unlike the traditional earnings per share (EPS) metric, the cash EPS metric is distinct in that non-cash items – such as depreciation and amortization – are not part of the calculation.

However, aside from the difference in the numerator (i.e. operating cash flow vs. net income), the denominator is the same.

The rationale behind the add-back of non-cash items like D&A is that such expenses are not actual cash expenses incurred by the company, but rather recorded expenses to abide by accounting rules.

Because non-cash items are excluded from cash EPS, the metric is less prone to accounting manipulation (i.e. earnings management), which offers greater transparency into a company’s “real” cash flow and earnings.

Adjusted Cash EPS Formula

An alternative method to calculate cash earnings per share (EPS) involves adding back the tax-affected value of non-cash items to net income, before dividing that value by the diluted weighted average shares outstanding.

Another difference from the prior formula is that the change in NWC is not factored into the metric.

Adjusted Cash EPS= [Net Income + D&A × (1 – Tax Rate)] ÷ Diluted Weighted Average of Shares Outstanding

In contrast to the prior method, the alternative formula tends to be more useful for quantifying the impact of non-cash items (and the “tax shield”) on a company’s earnings per share (EPS).

However, the inclusion of the net cash impact from changes in operating working capital items in the earlier presented formula is arguably more comprehensive.

Nevertheless, either approach can be informative in understanding a company’s actual profitability.

The important factor is to ensure that consistency is maintained when making comparisons to historical periods, as well as to industry peers.

Cash EPS Calculator — Excel Template

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

Cash EPS Calculation Example

Suppose we’re tasked with calculating the cash earnings per share (EPS) of a company using the following data pulled from its income statement for the fiscal year ending 2022.

Net Income = $10 million
Beginning Diluted Shares Outstanding = 6.25 million
Ending Diluted Shares Outstanding = 6.75 million
Depreciation and Amortization (D&A) = 2.5 million
Change in Net Working Capital (NWC) = –500k

Starting off with the numerator, we’ll calculate our company’s operating cash flow (OCF) by reconciling its accrual-based net income by D&A and the change in NWC.

Operating Cash Flow (OCF) = $10 million + $2.5 million – $500k = $12 million

In the next step, we’ll determine the denominator – the company’s diluted weighted average shares outstanding – by taking the sum of the share count assumptions from earlier and dividing by two.

Diluted Weighted Average Shares Outstanding = (6.25 million + 6.75 million) ÷ 2 = 6.5 million

The only remaining step to arrive at our company’s cash EPS is to divide its operating cash flow (OCF) by its diluted weighted average shares outstanding, which comes out to $1.85 per share.