## 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.

Table of Contents

## 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:

- Calculate Operating Cash Flow (OCF)
- Determine Diluted Weighted Average of Shares Outstanding
- Divide Operating Cash Flow (OCF) by Diluted Shares Outstanding

## Cash EPS Formula

The formula to calculate the cash EPS is as follows.

**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