Question

What are advantages and disadvantages of earnings per share as a measure of corporate performance?

7

Answer 1

Advantages:

1) EPS is an easy way to calculate the earning of the company for an investor per unit basis.

2) EPS helps Stakeholders to know the performance of the company in the specified time.

3) EPS helps Investors in decision making for investment in the company by comparing past performance with current year and company's performance with similar sectors performance.

4) it will also help to know the management's view in the short run as well as long run. If management has Growth plans it will keep the earning and invest it for long run else it will distribute it to shareholders as the dividend.

Disadvantages:

1) As every one knows that investment decision is relying on EPS, Management tries to show the EPS as high as possible which will affect the long run prospects as higher focus on short-run performance.

2) Different companies adopt different policies which make it difficult for stakeholders to take decisions on this basis.

3) Some time bad decision making has been taken by management to show the EPS high to get attract the investment by selling to bad customers which result in bad debts or sell at a lower margin to increase the earning figures.