The Problem with Earnings Per Share (EPS)
Zach DeGregorio, CPA
www.WolvesAndFinance.com
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In this video we are talking about Earnings Per Share and I am going to tell you the problem with this metric. Not many people talk about the problems of Earnings Per Share. But it is just like any other financial metric. There are good things about it, but also shortcomings. If you take the time to think through the concept of Earnings Per Share, it is going to help you in your career.
In my experience in the business world, Earnings Per Share is the most discussed financial metric. Everyone talks about it. The crazy thing is that I have never talked about Earnings Per Share on this channel. I have made a ton of videos, but have never discussed Earnings Per Share. The reason is because of the problems with it. I think it is often a misleading metric.
Let us start by talking about the definition. The point of Earnings Per Share is it is supposed to give you a simple metric to gauge the performance of a company. It is a very simple calculation: Net Income / Number of Shares. It describes the amount of income that is allocated to you as a shareholder. So if you own 1% of the stock, you have the right to 1% of the earnings if it is paid out as a dividend. This is used very frequently by stock investors as part of the P/E ratio to determine the price of stocks. The benefit of Earnings Per Share is it is simple, quick and easy quantitative metric you can use to judge a company.
The problem with Earnings Per Share is it emphasizes short term pay-outs to investors. Every quarter, a company releases financial statements. On those financial statements is Earnings Per Share. Earnings Per Share is a key metric that drives real life business decisions, sometimes with the wrong result. It drives short term investor gains, over long-term business performance.
Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.