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Hello P2-D2,
I am unable to understand these two limitations of EPS. If you explain so it would be amazing.(A) DEPS is only additional measure of past performance despite looking at future potential shares.
I am unable to understand this completely.(B) EPS cannot be used as bases of comparison between companies as the number of shares in issues in any particular company is not related to the amount of capital employed but one company has 100,000 $1 shares in issue and reserves of $4900000, Another company has 5 million 50 cents Shares in issue and reserves of $2500000. If earnings are same, EPS is different.
In this if we take Earnings of $200000 so Company A would give EPS of $2/share and Company B would give 40 cents/share. So it is giving different EPS but why is he telling about capital employed and reserves? Please explain this.I am unable to understand this importance of DEPS also.
“It can be used to assess trends in past performance.”Hi
(A) DEPS is trying to give an insight into the future by looking at the potential impact on the EPS figure once instruments are converted into shares but it is still base upon past performance as it takes the current earnings as the figure in the calculation. the earnings figure is a past performance indicator, it does not highlight what will happen in the future.
(B) You are being told about the capital employed and reserves to identify the number of shares that are in issue that are then to be used in the EPS calculation.
Hope that helps clear it up.
Thanks
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