Understanding Cash EPS Ratio
Cash EPS Ratio is calculated by adding non-cash items in profit after tax divided by weighted average share outstanding. This metric gives a clear picture of the cash earnings of the company. Cash EPS (Earnings Per Share) is also known as Operating Cash Flow, and it is measured on a Per-share basis. In other words, it indicates how much cash profit each share generates.
The formula to derive Cash EPS
Profit After Tax (PAT) - It is the amount that remains after a company pays off its all operating and non-operating expenses, liabilities, and taxes.
The company distributes Profit after tax to its shareholders as a dividend or retained it back into the business.
Depreciation -
It is the amount that indicates how much of the company's assets value has been used, and it is the process of deducting the cost of assets.
Weighted Share Outstanding - It is the number of shares the company calculates after adjusting changes in share capital during the year. The number of shares can vary during the year due to multiple reasons like buybacks of shares, new issues of shares, stock splits, conversion, etc. It is used because it provides a fair EPS value.
Example of Cash EPS: For the financial year, Bajaj Finance reported Profit after Tax as Rs. 4419.82 Cr. and Depreciation as Rs. 325.27 Cr. and Weighted Average Share Outstanding Rs. 60.26.
The value as per the formula (Profit after Tax + Depreciation / Weighted Share Outstanding) is calculated as [(4419.82 + 325.27) / 60.26)] = 78.74.
Key Highlights
Cash EPS is calculated by adding Depreciation and Profit After Tax (PAT) divided by Weighted Outstanding Shares
A high cash EPS ratio indicates better performance of the company in generating earnings.
Comparing a company with its industry peers or with its own historical data will give a better understanding.
While looking at the Cash EPS, the following points should also take into consideration:
A high Cash EPS is considered good. It indicates that the company is efficient in generating Earnings.
Cash EPS measures the company's profitability and ignores the impact of all non-cash items to provide accurate earnings generated by the company.
Cash EPS is hard to manipulate and gives a clear picture of a company's earnings. And it is measured on a per share basis.
If there is a large gap between the cash EPS and EPS, it can be due to capital investment made by the company, which impacts non-cash items in Income Statement or due to smart account practices followed by the company.
How to use Cash EPS effectively
Investors should look for a high Cash EPS ratio. It shows the better performance of the company in generating earnings.
Comparing a company with its industry peers or with its own historical data will give a better understanding.
It is better to analyze the companies past performance of Cash EPS.
If the company's Cash EPS are continuously growing over a period is a good sign.
For better analysis, we should check other financial metrics with Cash EPS like
PE ratio,
PB ratio,
Earnings Yield, etc.,
