28 October 2006

Valuation Metrics - Per Share numbers

The widely reported Earnings per Share values are determined by dividing Net Income, or some variant of Net Income, by the number of Common Shares Outstanding.  At the end of each quarter, companies often announce the EPS for that quarter and the EPS for the fiscal year to date.

We prefer a different EPS calculation.  We use the Net Income for the last four quarters, irrespective of fiscal year boundaries, to compute a trailing-year EPS.  This approach eliminates any seasonality factors that favor one quarter over another.

The EPS denominator can be a simple average of the number of common shares outstanding over the period of earnings, or the number of shares can be inflated (i.e., "diluted") to account for the future exercise of stock options and other instruments convertible into common shares.   When making EPS comparisons, it is important to stick to one approach.

It can also be insightful to track other financial parameters on a per-share basis. These parameters include Operating Income, Net Operating Profit After Taxes (NOPAT), Cash Flow from Operations (CFO), Free Cash Flow (FCF), Working Capital (i.e., Current Assets minus Current Liabilities), and Shareholders' Equity.

A few words about the last two terms.  Working Capital identifies net value of the company's most liquid assets, after paying the short-term bills.  If you can buy shares in a company for less than its Working Capital per share, you probably bought the company at a discount.

Shareholder's Equity is also called the Book Value.  So-called Value Investors look for an opportunity to buy shares at no more than a small premium to the Book Value per share. However, it is very important to understand that book value might be very different from market value. For example, capital assets will be valued based on depreciation schedules, not on what they might fetch at auction.

On our Income Statement tutorial, the fictional GCFR, Inc., had Earnings Per Share of $0.46 in the three months ending 30 June 2006, up from $0.41 in the same period of the previous year.  EPS, therefore, increased by about 12 percent.

GCFR, Inc., in the June 2006 quarter, had a Net Operating Profit After Taxes per share of

     [(6.7 + 0.1) * (1 - 0.345)] / 12 = $4.454 million

and 12 million shares outstanding, for a NOPAT/share of $0.37. In the year-earlier quarter, the figures were $3.96 million and 11.6 million shares, resulting in a NOPAT/share of $0.34.  The increase of this parameter was about 9 percent.

By switching to our Cash Flow Statement tutorial, we see that GCFR, Inc., had Cash Flow from Operations of $29.7 million in the 12 months ending 30 June 2006.  Since there were 12 million shares outstanding, CFO/share equaled $2.47.   In the previous year, CFO/share was about $1.91.

GCFR's Free Cash Flow during the twelve months that ended in June 2006 was $23.2 million, which was equivalent to $1.93 per share.  In the previous year, Free Cash Flow was $22.2 million - $15.8 million = $6.5 million, or $0.56 per share.

We can also look at various Balance Sheet metrics on per-share basis.

For example, GCFR had Working Capital of $75 - $41 = $34 million on 30 June 2006.  Working Capital per Share was $2.83.

Book Value per share was $134 million/12 =  $11.17.

Revised 3 October 2009


  1. Forgive my ignorance.

    But please advise me which web page shows the balance sheet and income statement you are using to calculate "Valuation Metrics - Per Share numbers" --- http://www.financial-gauges.com/2006/10/valuation-metrics-per-share-numbers.html ?

    I don't think you are using :



    because the numbers do not tally with your per share calculation.

    Please enlighten.

    Thanks a million.

  2. studentguru, Good question. The short answer is that the numbers in this post are drawn from PepsiCo's financial statements through Sept 2006. As part of an effort to improve this blog's earliest posts, I have written them extensively and replaced PepsiCo's figures with fictional data. However, I haven't yet revisited this post. Send me an email at ncarvin [at] financial-gauges [dot] com if you have specific question about how to calculate the numbers above.