Question

In: Operations Management

What are the advantages and disadvantages of high Earnings Per Share ?

What are the advantages and disadvantages of high Earnings Per Share ?

Solutions

Expert Solution

What are the advantages and disadvantages of high Earnings Per Share ?

The Earnings per share is simply defined as the company's profit divided by the outstanding shares of its common stock.

The advantages of a high Earnings per Share or EPS are that higher EPS will indicate more value becuase investors will definitely pay more for a company making more profits. Further, a higher EPS usually results in putting a high price to a stock and for investors to know which stock to invest in as it acts as a proxy indicator of the company doing well.

More than disadvantages, there are limitations of earnings per share itself which can lead to wrong or inaccurate indication of how the business is doing. For example, companies can easily manipulate EPS by reducing their no of shares outstadning by buyinb back their own shares. This can lead to higher EPS indicating that the company may be doing well which may not be true. Further, higher EPS fails to capture the performance of the company as it fails to take into account the price of the share. If used together with the share price, higher EPS can be a good indicator else not.


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