EPS, also known as earning per share, is one way to measure how much earning from company is attributable to a unit of share. The formula is to divide the total net earning or “earning attributed to shareholders” by number of share issued in the market. Many stock investors use EPS as criteria of investment mainly because it is the easiest method, however, it also opens for manipulation.
1. Real EPS – earning that is organic. Meaning the numbers shown in the income statement are the result of business performance or better market environment. Good business performance such as improving and growing of sales and revenue as a result of widening market share. Better market environment such as high employment rate nation wide and people are willing to spend. In short, real EPS is base on natural financial ecosystem.
2. Artificial EPS – earning that is manufactured. Meaning the number shown in the bottom line of an income statement (net earning) is deliberately adjusted to look good. This can be done through cost cutting, tax deferring or manipulative accounting. For example, if there is dropping/flat revenue or sales, smart management can adjust the middle line number to make the bottom line looks good. With artificial EPS, even though a dropping revenue and sales can be made to look like growing net earning by drastically cutting cost across the board.
As a conclusion, there are many things we can’t see by only looking at EPS. In order to have a clearer picture we also need to look at their sales revenue, and how they arrive at the net profit.