Now-a-days, investors take note of companies' earning per share or EPS more closely than any time in the past. Whenever, a news item on the EPS comes on the online trading system of the Dhaka Stock Exchange, they rush to see computer screen to see what the news is all about. If it is about the earning per share, they give a closer look at it and compare it with that of previous years. They either become happy or take off the eyes with a bad feeling.
If the news is about an increased EPS, the investing public become happy and place more orders for buying that particular stock. As a result, the price of the stock goes up, and the trend lasts a few days. But if the news is bad, that is about a decline in the stock's EPS, then selling pressure goes up, and the stock loses some prices. The extent of gain or loss in the particular stock's price depends on the extent of the gain or loss in the EPS. Sometimes, dismal news about the EPS comes, and investors are caught up with so bad a feeling about the company or its stock, they sell the entire holding of the stock.
But the problem before the investors is which EPS they read. It is either quarterly or half yearly or that for nine months. A quarterly EPS may be a misleading one, because many companies do the cyclical or seasonal business. This means EPS for a particular quarter may be bad, but that is made up in the next quarter when companies' business goes up. Also, the EPS statistics that come up online or are made public by the companies, as per the directive of the regulator, are un audited one, and hence do not reflect the true earnings of the company.
Investors are to read EPS with pluses and minuses. What the investors do to know what the whole year's EPS is: they multiply the quarterly EPS with four. Again this annualised EPS might give misleading statistics. Many companies' quarterly EPS is poor, but at the end of the year, the annual EPS gets a boost. On the other hand, the reverse may also happen. That is, investors shall have to be extra careful while they read the stocks' EPS for investment purpose. How do they use the EPS for investment purpose?
One simple lesson is taught in the classrooms that an investor should see at what multiple EPS he is buying a stock. Given a static EPS, the higher is the price of the stock compared to the EPS, the more time will be needed for the investor to recover his invested money. For example, if the EPS of a particular stock is Tk.10 and if the investors buy the stock at Tk.100, he will need 10 years to get back his capital.
That is why, many experts advise the investing public to buy stocks with low-price earning multiples. If they go for too high multiples, they run into a big risk. But is the advice correct all the time? No. It all depends on other factors, like future business prospects of the company, change in the management, interest rate in the economy, the conditions of other macroeconomic indicators in the economy and above all, the GDP (Gross Domestic Product) growth rate.
The trend of price movement as a whole is also important. A bull run in many cases upsets many calculations and prompts the investors to defy the experts' warnings.
In stock market investment, it is said, nothing is called a high price or a low price. In both lows and highs, investors can make money if they know how to make it. However, one important statistics is to be understood whether a stock is overpriced or under-priced at a particular time.
The future direction of the EPS is very important. If the investors can calculate or understand correctly the future movement of EPS of a stock, he will, in all probability, gain. EPS may record a quantum jump in the coming years. If investors can identify the prospective stocks with a higher future EPS, buying at a higher price earning multiple of these particular stocks now will give them a much better return in the coming days.
EPS is important, but more important is the change in it. Warren Buffet, the greatest of all investors, said, "You identify the stocks now, and wait for good days." He advised: do not see good results now, see the good results in future only.
The writer is a Professor of Economics, University of Dhaka. abuahmedecon@)yahoo.com
