Earning Per Share (EPS) means 'the earnings generated by the business and available to shareholders during a period to the number of share in issue.' In general, EPS is the result of the company's profitability. Higher EPS can demonstrate the company's ability to generate profit per capita, which also shows the company's abilities in either implementation, management, technologies or so on.
As far as Pearson is concerned, the Basic EPS for 2008 and 2007 is:
As far as Pearson is concerned, it can be seen that there is a slight increase in EPS. It could be seen as a good trend as it indicates within this certain period of time Pearson is on a positive track way of managing its business and it can be seen as a good signal to investors who is interested in Pearson.
Comparing with McGraw-Hill, it can be seen that Pearson's is far more less in EPS. This only indicates that, under the same conditions, McGraw-Hill is more efficient to generate profits.
However, it is not always 'the higher the better'. Some limiting factors need to be noticed
- The single EPS can only show the earning of the each common share, without considering other limit factors such as the volumes of common share, or the earnings. In 2008, Pearson has issued 797 million common stocks, which is 2.5 times more that McGraw-Hill. In addition, Pearson's earning is only 36.5% of McGraw-hill. It seems that, McGraw-hill tend to be more 'bright' that Pearson, however, the gross profit margin of Pearson is 55% while the McGraw-hill is 21.32%. Investors need to focus more on the perspectives of the firm rather than sticking on a number reflecting price of a certain period of history.
- EPS cannot tell the risk behind the investment. For example, a poor investment program maybe launched without the serious consideration. It maybe impact nothing on EPS however, it may increase the risk. Therefore the investors' fund can be at risk.
- Different firm may have different ways to calculate and form the accounting records, different methodology can lead to varied results in final data. For example, Pearson has used GBP as the standard while McGraw-Hill's is USD. Then the final result is differentiated.
Therefore, to investors, some recommendations can be made:
- Extending the time horizon of analysis. As can be seen from Pearson and McGraw-Hill's table above, it's difficult to make final decision about which one to choose for investment. Pearson and McGraw-Hill are both large corporations and a significant amount of revenue are generated from multi-regional departments or un-core business, for example. Pearson has 7 main business sectors. By extending the time horizon of financial reports, investors can understand regularity and possible reasons of those historical data to assist the decision making.
- Don't ignore the notes of EPS in financial report. By looking at the notes, investors can find out the specific way how the company got the specific number, especially for non-specialist
- Combining other financial indicators. EPS cannot totally reflect the financial performance and cash flow status of the company. By only concerning with EPS, investors can be mis-leaded. Therefore, ratios and industry averages should be all included as the investor's references.