How would an investor use the earnings per share information

How would an investor use the earnings per share information reported on the income statement in making investment decisions and what limitations should be recognized in using EPS data

Solution

Earning per share means the earnings that the shareholders get per share share . In other words the profitability of the firm on per share basis. Investors analyse the return per share and based on what the investors expect and what the investment provides , the investors make the decision.

limitation in using the EPS data

1. As the companies have a different accounting policies it si difficult to compare the EPS data

2. As the EPS ignores the cash flow. The management might increase the EPS by selling the goods to the doubtful customers and in the end it may leads to the bad cash flow where as earnings showing the big numbers

3. EPS ignores the Inflation as the prices of the goods and service may be increasing and showing the high EPS figure but this trend may not be followed in the future and can leads to a fall decision

4. As the investors rely on the EPS figure so there might be the management decision to show the High EPS figures in the short term and may mislead the decisions of the long term.