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Hi,
This is part of the solution to an interpretation question (Gregory – Q440 Kaplan):
The reason why the EPS may not have increased in line with reported
profit is that the acquisition was financed by a share exchange which increased the
number of shares in issue. Thus the EPS takes account of the additional consideration
used to generate profit, whereas the trend of absolute profit does not take additional
consideration into account. This is why the EPS is often said to be a more accurate
reflection of performance than the trend of profits.I’m not sure I fully understand the statement specifically the part “whereas the trend of absolute profit does not take additional consideration into account”
Can you help put this into simple language that’s more understandable?
It is essentially saying that the shares in issue have increased as a result of the acquisition via a share exchange, however we do not see an increase in the profit we require to maintain or increase the current level of profit. This means that although the profit figure will have increased as the profit is now of the enlarged group, it hasn’t led to an increase in the EPS figure.
Let me know if that makes more sense and if not then I can add more.
Thanks
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