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.