Question
ble below shows the Earnings Per Share for Sam plc for the last 2 years: Ratio & 31-Dec-2021 & 31-Dec-2022 & 28 mathrm(p) & 15 mathrm(p) of the following statements is an incorrect interpretation of the ratios: m a shareholder's perspective, the EPS ratio can help assess the investment potential in issuance of additional company shares to the public could result in reducing its EPS rati p/c definitely generated lower revenues in 2022, compared to the year before. plc might have generated lower profits for the year ended 2022.
Answer
4.4
(254 Votes)
Wynn
Professional · Tutor for 6 years
Answer
Statement c is incorrect. The Earnings Per Share value for a company does not necessarily unequivocally represent the company's revenue earnings in a particular year. Decreased EPS might be associated with reduced profits, enhanced company shares or any other comparable factor. Hence, statement c is an incorrect interpretation of the ratios.
Explanation
## Step 1:Let's analyse each statement in light of the provided EPS information. Statement 'a' mentions that from shareholders perspective EPS can help assess investment potential of a company. This is a true statement as EPS, that is Earnings Per Share, is a measure of how much profit a company has earned for each outstanding share of its common stocks. Investors often use this ratio to evaluate profitability of a company.## Step 2:Statement 'b' implies that an issuance of additional company shares could lead to a reduced EPS ratio. This statement is also correct because the denominator is the total number of shares. If the company issues additional shares, without an proportionate increase in net income, the EPS value would decrease.### Step 3:Statement 'c' makes an inference that Sam plc definitely generated lower revenues in 2022 than the previous year. This is incorrect as EPS does not specifically correlate to revenues but is most closely related to net profits after all expenses and taxes. Therefore, a lower EPS in 2022 as opposed to 2021 speaks to a decrease in the profitability or earnings per share in 2022, rather than definitively suggesting that revenues was lower during the same period. ### Step 4:Statement 'd' suggests that Sam plc could have generated a lower profit in year 2022 based on the EPS ratio. This is a possible interpretation but not always true. Fall in EPS ratio can occur for multiple reasons – one among them can be the generation of lower profits, causing a decrease in numerator. Additionally, it can also happen due to an increase in the divisor, that is, more shares being issued. However, from the limited information provided in the table, it can be inferred in the absence of other data.