A love affair with EPS - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

A love affair with EPS

Jul 13, 2009

It is no secret that the earnings a company is able to achieve in a particular year or quarter holds a special place in the hearts of most participants in the stock market. Predicting next quarter's earnings for a company is one of the hottest topics of discussion (or more aptly - speculation) on 'business' channels. And if the earnings turn out to be not in line with those 'estimates'... boom! The stock gets a beating on the day of the earnings announcement. This extreme fixation on the most recent earnings per share (EPS) of a company, at the cost of ignoring many other aspects of sound evaluation of a business, can be very dangerous to say the least. As Benjamin Graham once expounded, there are many pitfalls to relying solely on the company's current earnings performance to decide whether or not it is worth investing in. Some of them are as follows -

  1. Instead of the double test of value provided by evaluating both the earnings and the assets of a company, one would be relying upon a single and therefore less dependable criterion. Even though earnings are important and have their own rightful place, a company's resources still have some significance and require attention.

  2. Second, these earnings statements, on which exclusive reliance has come to be placed, are subject to more rapid and drastic changes from time to time. Much more than those which occur in balance sheets. Due to this, a much higher degree of instability and volatility is introduced into the valuation of stocks. This is painfully evident in the way prices of stocks can change drastically from year to year, or even from day to day, even though actual changes to a business would take much longer and be much more gradual.

  3. Third, the income statements can be much more vulnerable to misleading presentation and mistaken interpretation than is a balance sheet. For example, big changes in extraordinary income or other income whose source is other than from that of the core business of the company can bring in added complexity to the final EPS figure of the company. Thus, many a times giving out a distorted picture of the earnings power of the company. More often than not, this and many other such subtleties go unnoticed. What stands out most prominently is the final EPS figure and its change from the previous year. And that's what ends up having an immediate and strong effect on the price of the stock.

If you are were the owner of a private business, you would surely not decide the worth of your business solely on the basis of its most recent operating results, without giving any attention to the resources the business commands (its assets). But that attitude, for some unwarranted reason, changes when one lays down his own business' statement, and picks up that of a listed company. By paying excessive attention to earnings and conversely, no attention whatsoever to the balance sheets, one exposes oneself to all the perils discussed above.

Equitymaster requests your view! Post a comment on "A love affair with EPS". Click here!


More Views on News

BSE Sensex Surges 707 Points; BHARTI AIRTEL Among Top Gainers (Market Updates)

Sep 25, 2020 | Updated on Sep 25, 2020

The BSE Sensex Surged 707 Points; BHARTI AIRTEL Among Top Gainers. Find the latest update, special reports and news on all time high gainers of BSE Sensex at equitymaster.com.

It's When You Sell that Counts (Profit Hunter)

Sep 25, 2020

How I alerted readers to the impending crash last week.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

How to Save Money by Exiting Stocks Before They Fall podcast (Views On News)

Sep 24, 2020

A penny saved is a penny earned. It doesn't matter where you enter. All that matter is where you exit. Watch this video to identify an opportune time to exit your investments and book profits.

ICICI Prudential ESG Fund: Aims for Sustainability (Outside View)

Sep 24, 2020

PersonalFN briefly explains the newly launched fund : ICICI Prudential ESG Fund.

More Views on News

Most Popular

Benjamin Graham Deep Value Stocks

The insights from a man who pioneered arguably the most successful form of investing there is.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 25, 2020 01:15 PM