Question

One criticism of our stock market is that too much emphasis is placed on short term accomplishments, such as an increase in earnings per share. What can management do to increase earnings per share? Do such actions negatively affect the business? If so, how? Can you think of another performance measurement that might be more meaningful, in the long term, than earnings per share?

Answer 1

Solution:

What can management do to increase earnings per share:

arnings Per Share – EPS:

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. It is common for a company to report EPS that is adjusted for extraordinary items and potential share dilution. The higher a company's EPS, the more profitable it is considered.

Formula: Earnings per Share=Net Income − Preferred Dividends​ / End-of-Period Common Shares Outstanding

1. Earnings per share is a company's profit divided by the number of common stock shares it has outstanding.

2. EPS shows how much money a company makes for each share of its stock.

3. A higher EPS indicates more value because investors will pay more for a company with higher profits.

4. EPS can be calculated in various ways, such as excluding extraordinary items or discontinued operations, or on a diluted basis.

Performance Measurement:

The performance measurement revolution has seen a move away from the problems of past measurement systems. Five common features of out-dated performance measurements systems were:

• Dominant financial or other backward-looking indicators

• Failure to measure all the factors that create value

• Little account taken of asset creation and growth

• Poor measurement of innovation, learning and change

• A concentration on immediate rather than long-term goals