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EARNINGS PER SHARE AS A MEASURE OF FINANCIAL PERFORMANCE: DOES IT OBSCURE MORE THAN IT REVEALS?

JHvH de Wet

DOI: 10.22495/cocv10i4c2art3

Abstract

The well-known earnings per share measure is simultaneously very popular but also potentially misleading. This study briefly discusses the popularity of EPS and then outlines three limitations, namely the inability of EPS to reflect shareholder value, EPS management and an inherent bias towards positive EPS growth. A case study approach is used to analyze the EPS growth of three listed companies and the four major components of EPS growth are identified. These are inflation, increased asset investment due to retained profit and debt, operating leverage and financial leverage. It is indicated how an “ excess” EPS growth can be determined and it was found that none of the three case study companies was able to generate positive “excess” EPS growth.

Keywords: Earnings per Share (EPS), EPS Growth, Earnings Management, Operating Leverage, Financial Leverage, Shareholder Value, Sustainable Growth Rate

How to cite this paper: De Wet, J. H. v. H. (2013). Earnings per share as a measure of financial performance: Does it obscure more than it reveals? Corporate Ownership & Control, 10(4-2), 265-275. http://doi.org/10.22495/cocv10i4c2art3

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