About EPS

Date: 4 Feb 2016

If you’ve gone through my modules, especially in measurement and assessment, you will notice that I don’t particularly use EPS nor did I set a KPI for EPS.

There is of course a reason and I would like to share with you.

In the foreign markets, it is a norm for many companies to borrow money from financial institutions to buy back their own company’s shares. There is an objective in this, and that is to achieve a higher EPS. How so?

EPS = Total Earnings/Total Number of Shares in Circulation

The lower the number of shares in circulation, the higher the EPS. The high EPS would have a profound impact on the PE Ratio, where:

PE Ratio = Share Price/EPS

So the higher the EPS, the lower the PE Ratio. Because investors sometimes value a company by referring to its low PE Ratio, it makes the company attractive. But in actual fact it MAY NOT be.

So that is why I never set the KPI for EPS and PE ratio, because these two could be manipulated to the advantage of the company NOT to the investors.

So we have a scenario of an artificially inflated EPS, artificially lowered PE Ratio and an increase in debt.







About The Author


Author of the books “Invest In Foreign Shares!” and “Invest In REITs!” both books are available at Popular bookstores “Invest In Foreign Shares!” reached Popular’s top 10 bestseller in August 2014 in the non-fiction category

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