Definition of 'Cash Earnings Per Share - Cash EPS'

A measure of financial performance that looks at the cash flow generated by a company on a per share basis. This differs from basic earnings per share (EPS), which looks at the net income of the company on a per share basis. The higher a company's cash EPS, the better it is considered to have performed over the period. A company's cash EPS can be used to draw comparisons to other companies or to the company's own past results.

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Commonly used ratios As there are different measures of profit (such as gross profit, operating profit and net profit), we can calculate one profitability ratio corresponding to each measure of profit. These ratios are gross profit margin (GPM), operating profit margin (OPM) and net profit margin (NPM). Other indicators Besides these commonly used ratios, there is another set of profitability ratios. These measure the profit earned by the company on each rupee of capital invested in it. These are return on capital, return on assets and return on equity. Here, however, we will discuss the first set of profitability ratios. Gross profit margin: It is the ratio of gross profit (sales minus cost of sales) to sales. Consider a company with Rs 100 as sales and Rs 10 as cost of goods sold. The gross profit would be Rs 90 (Rs 100Rs 10) and GPM would be 90 per cent (Rs 90/Rs 100). A higher GPM compared to others in the same industry indicates either or both of the two possibilities: higher realisation on each unit sold and the ability to source raw materials at a lower cost. Operating margin: It shows the impact of operating cost on a companys profitability, and is calculated as operating profit divided by sales. A high operating cost affects the OPM. In the above example, if the operating cost other than the cost of sales is Rs 50, the operating profit would be Rs 40 (Rs 90Rs 50) and OPM would be 40 per cent. If OPM increases over time and GPM remains the same, it indicates improvement in operating efficiency. Net profit margin: It shows how much a company saves after meeting all its expenses. So, an NPM of 20 per cent would mean that a company is able to save Rs 20 per Rs 100 sales after meeting all its expenses. If a companys NPM increases over time and OPM remains the same, it indicates reduction in non-operating expenses such as taxes and the interest outgo.

Profitability ratios help you pick the best among various stocks. The higher the ratio, the better it is. However, ensure that the comparison is made among companies from the same sector as different industries have different levels of profitability.

Operating Profit Margin Ratio Definition

The operating profit margin ratio indicates how much profit a company makes after paying for variable costs of production such as wages, raw materials, etc. It is expressed as a percentage of sales and shows the efficiency of a company controlling the costs and expenses associated with business operations. Phrased more simply, it is the return achieved from standard operations and does not include unique or one time transactions. Terms used to describe operating profit margin ratios this include operating margin, operating income margin, operating profit margin or return on sales (ROS).

Operating Profit Margin Formula

The operating profit margin ratio formula is calculated simply using: Operating profit margin = Operating income Total revenue Or = EBIT Total revenue

Operating Profit Margin Calculation

Operating profit margin calculations are easily performed, including the example below. Operating Income = gross profit operating expenses Example: a company has $1,000,000 in sales; $500,000 in cost of goods sold; and $225,000 in operating costs. Operating profit margin = (1,000,000 - 500,000 - 225,000)= $275,000 / 1,000,000 = 27.5% This means that a company makes $0.275 before interest and taxes for every dollar of sales.

3. Earnings per share (EPS)

EPS is a well-known and widely used investment ratio. It is calculated as:

Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend. The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share. This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments. Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback. Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular companys shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment. On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios. Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios. To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings. All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions? The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the companys future prospects.

If it is low compared to the future prospects of a company, then the companys shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 dont summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the companys future indicates sharply declining sales and large losses.

5. Dividend and yield

There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations. It is illogical to draw a distinction between capital appreciation and dividends. Money is money it doesnt really matter whether it comes from capital appreciation or from dividends. A wise investor is primarily concerned with the total returns on his investment he doesnt really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations. Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth. On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends. On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income. Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the companys shares. This relationship is best expressed by the ratio called yield or dividend yield: Yield = (Dividend per share / market price per share) x 100 Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.

Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each. If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent. The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares. Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio. A measure of financial performance that looks at the cash flow generated by a company on a per share basis. This differs from basic earnings per share (EPS), which looks at the net income of the company on a per share basis. The higher a company's cash EPS, the better it is considered to have performed over the period. A company's cash EPS can be used to draw comparisons to other companies or to the company's own past results.

Investopedia Says: You may sometimes see cash EPS defined as either EPS plus amortization of goodwill and other intangible items, or net income plus depreciation divided by outstanding shares. Whatever the definition, the point of cash EPS is that it's a stricter number than other variations on EPS because cash flow cannot be manipulated as easily as net income. Related Links: Investors need to know the varieties of EPS and what each represents to really determine whether a company is a good value. Investors Beware: There Are 5 Types Of Earnings Per Share We go over the concepts behind the excitement over the most important figure in the stock market. Everything Investors Need To Know About Earnings Learn this easy-to-understand technique of analyzing a company's financial statements and reports. Introduction To Fundamental Analysis Learn what it means to do your homework on a company's performance and reporting practices before investing. Advanced Financial Statement Analysis

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