cash flow

A measure of a firm’s financial strength, cash flow per share is earnings after taxes plus depreciation, on a per-share basis. Cash flow has traditionally been calculated by adding noncash expenses back to earnings after taxes and subtracting dividend payments. Noncash expenses such as depreciation, amortization and depletion are taxable expenses that appear on the income statement but require no cash outlays. They represent the accountant’s attempt to measure the reduction of the book value of assets as the assets are depleted. While dividends are a discretionary item, they are a real cash outlay that is not tax deductible and is not reflected in earnings. Subtracting dividends and adding back noncash expenses to earnings provides an estimate of cash flow.