Question

Earnings per share (EPS) is a popular financial ratio. It is easily accessible to
investors as a company gives EPS figure on its annual reports. Often, it is the first
ratio that investors look at for its powerful indication of company’s profitability. Do
you agree with Mr Boboboy’s concern? Discuss THREE (3) reasons on whether it is
appropriate to depend only on EPS figure to value a company’s future performance.

Answer 1

EPS is most definetely a popular financial ratio and is surely one that investors have their eye on always. From the eyes of the investor the only thing that matters is returns on their investment.

But having said that, It is totally inappropriate to depend only on EPS figure to value a companys future performance. A company that is well established and doing great business will have a high EPS figure and that is a positive sign for investors. Pretty straight forward.

At the same time, companies which are in growing stage wouldnt have that great an EPS figure. That doesnt mean this company's future is not looking good. In fact in a few years time, this company could even over take the previous one which already had a high EPS.

EPS should never be looked at alone. Other financial elements in the financial statements must also be taken into consideration when looking at it. For eg. If there has been some huge expenses as part of a expansion or something of that sort. That means the EPS for that year would be a bit low but when loooking at the future, the investment made could lead to even greater income in the future.

So, If the EPS isnt as high as desired, its always good to run your eyes through the financial statements to see the reason why. If it is because the buiness is not doing well, thats a different story. But if it is due to some other expenses which would eventually lead to better prospects for the company, then it has to be considered.

Hope this answers the question. if you liked the answer, please give an up-vote. It would be highly encouraging for me. Thank You.