Is EPS relevant?

[Enlighten_me]

The book mentions EPS there is no need to calculate EPS, well that is aside from forecasting future

EPS, as it is already in the financial statements.

Most of all, it doesn’t reflect difference in profitability between 2 companies.

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Ex: Company A with $1000 earnings and $100 shares… EPS of 10.

Company B with $1000 earnings and $1000 shares… EPS of 1.

Same profitability.

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So should we really bother knowing this(aside for answering the test)?

Or is there something more to this (forgive my ignore… still a level 1 candidate)?

[Enlighten_me]

* forgive my ignorance

[lawnm0wer]

Comparing dollar value of EPS company to company is not relevant for the example you gave above. Time series analysis is more appropriate, reviewing an individual company’s EPS for increasing or decreasing trends. These trends can then be compared to other companies for a cross sectional analysis. It is important to note, though, that EPS can be artificially increased or decreased through a number of accounting tricks, most notably by increasing or decreasing total shares outstanding.

It is important to understand EPS in both its benefits and flaws. Wall Street puts huge emphasis on EPS every quarter, but it should be only one piece in an analyst’s toolbox in reviewing a company.

Lastly, don’t ask forgiveness for asking questions. It’s good for others to revisit the information and good for you to know the answer to pass the test.

[FratBoyDeluxe]

Basically, EPS is not comparable between companies because the number of shares outstanding differ.

[Enlighten_me]

@lawnm0wer

Comparing dollar value of EPS company to company is not relevant for the example you gave above. Time series analysis is more appropriate, reviewing an individual company’s EPS for increasing or decreasing trends. These trends can then be compared to other companies for a cross sectional analysis. It is important to note, though, that EPS can be artificially increased or decreased through a number of accounting tricks, most notably by increasing or decreasing total shares outstanding.

It is important to understand EPS in both its benefits and flaws. Wall Street puts huge emphasis on EPS every quarter, but it should be only one piece in an analyst’s toolbox in reviewing a company.

Lastly, don’t ask forgiveness for asking questions. It’s good for others to revisit the information and good for you to know the answer to pass the test.

Thanks for your insight and encouragement(

So did u mean that we are to compare EPS growth over time in Company A vs EPS growth over time in Company B for the purpose of knowing which of the 2 companies have a higher EPS growth rate?

If that is the case, wouldn’t it better to just focus on earnings growth rate? I don’t think we would be missing a lot if we knew whether the company issued more shares or not. Would we?

[lawnm0wer]

You’re correct. Focusing on earnings growth rate would be fine instead of EPS growth, since it is easier to misrepresent the latter to the unsuspecting analyst.

[Enlighten_me]

@lawnm0wer

You’re correct. Focusing on earnings growth rate would be fine instead of EPS growth, since it is easier to misrepresent the latter to the unsuspecting analyst.

Got it! Thank you and since you’ve been answering my questions in my other post, thanks again.