Demystifying the Annual Report (4)
July 11th, 2008 Tunde Brown || tunde.brown@stockmarketnigeria.com
The Earning per Share is a focal tool in the determination of some other performance or viability indices. This is because it shows the relevance of the millions and billions declared in net earnings by companies to every unit of holding, such that there is a fair measurement that considers the effect of additional financing and changes in equity profile arising from bonuses, rights share splits and reverse splits. With this figure, an investor is able to determine how much the investment in every unit of equity held, has generated. It is out of these earnings, most of the time, that dividends are declared. So, the extent of the dividend a company may be able to declare at the end of the fiscal year could be determined by monitoring the quarterly EPS.
By and large, increased earnings gives a good indication on stock viability. But the source of that increase can be revealing. Earnings due to a non-recurring (Extra-ordinary items) event or accounting changes are likely to give a false picture. The investor must look at revenues and expenses and make sure that revenues from operations are not being out-paced by expenses. One index with which the EPS make more meaning is the P/E (Price/Earning) Ratio. Dividing the EPS by the Market Price of the stock derives the P/E ratio of that stock. In effect, the answer shows how much investors are willing to stake per naira of earning.
A stock with a relatively high P/E Ratio is expensive, meaning that expectations from the investing public of the company are high. Whether P/E Ratio is on the high side or low, both scenarios have their meanings against the backdrop of the situation of the company being analysed. However, caution must be applied as financial ratios only make meaning if companies are accessed within the context of the sector/industry they belong. A relatively high P/E ratio is typical of some industries/sectors, while some may be usually low.
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