In business, the priority is earnings. You need earnings to settle your operating expenses, pay taxes and expand your business.
No company can survive without earnings. Earnings go by different names. Profit, income, the bottom line and earnings are all the same.
EPS (earnings per share) is the most often used metric to evaluate a company. Many people just look at EPS and then decide whether the company is good or no good. This is a mistake.
When you look at EPS, you must also look at revenue and the actual amount earned so as to have an idea about its profit margin. A high profit margin is better than a low one.
Often overlooked is the quality of earnings. Earnings can come in many forms. These are:
01) Profits from normal trading and services provided by the company
02) Sale of a property or some properties that are outside its business model
03) Sale of treasury shares
04) Sale of some financial instruments, such as equities or bonds
05 A change in depreciation rates
06) Appreciation of foreign money against the local currency
All the above activities can affect earnings. So, the next time you look at EPS, do not forget to read the income statement in the quarterly or annual report to know how the earnings come about. Bear in mind that some earnings are just one-off affairs and are not repeatable in the foreseeable future.
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