Cash per Share is a ratio of current cash that a company has on its hands as opposed to capital obtained by loans or other forms of financing. In general, the capital that a company has on its hands can be spent for different reinvestment activities such as buying assets, paying back debt, research and development (R&D), making dividend payments to shareholders, etc.
You can calculate the cash per share (CPS) by totalling a company’s cash on the balance sheet, including easily liquidated short-term assets, and then dividing that amount by the number of shares outstanding.
Closer look at cash per share
This ratio indicates how liquid a company’s assets are and how healthy a company is. High cash per share levels confirms that a company is doing well. It guarantees shareholders that there is a sufficient financial buffer to cover any crises. Moreover, it ensures that the company has sufficient resources to reinvest in the business, return money to investors, or do both. Therefore, some investors prefer this ratio rather than earnings per share (EPS) to check the financial health of a specific company
Companies with high Cash per Share ratios easily catch the attention of investors and make them consider the current company as an attractive investment. If you come across an equity instrument trading below its cash per share value, you have a bargain and should consider investing in it. Moreover, value investors often compare this ratio to the current stock price, and if it exceeds the stock price they would start trading it.
However, holding onto lots of cash is not always a positive indicator. Reversely, it can signal that a company does not reinvest in its own operations and show general management inefficiencies. In fact, the company that spends the cash for some reinvestment opportunities rather than holding the cash can earn a higher rate of return.
To read more about Islamic Finance related topics, please click here and visit our academy.
Also, feel free to sign up for our free stock screening services at musaffa.com.