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The table below shows the Earnings Per Share for Guru plc for the last 2 years: multicolumn(1)(|c|)( Ratio ) & 31-Dec-2021 & 31-Dec-2022 EPS & 23 p & 30 p Which of the following statements is an incorrect interpretation of the ratios: EPS relates the after-tax profits generated by the business during a period to the number shares in issue. A company could be reporting a rising EPS even though its earnings are declining. In 2022, the company generated 30 p in revenue for every ordinary share in issue. EPS is considered a useful measure of share performance used by shareholders to assess t investments.

Question

The table below shows the Earnings Per Share for Guru plc for the last 2 years:

 multicolumn(1)(|c|)( Ratio ) & 31-Dec-2021 & 31-Dec-2022 
 EPS & 23 p & 30 p 


Which of the following statements is an incorrect interpretation of the ratios:
EPS relates the after-tax profits generated by the business during a period to the number shares in issue.
A company could be reporting a rising EPS even though its earnings are declining.
In 2022, the company generated 30 p in revenue for every ordinary share in issue.
EPS is considered a useful measure of share performance used by shareholders to assess t investments.

The table below shows the Earnings Per Share for Guru plc for the last 2 years: multicolumn(1)(|c|)( Ratio ) & 31-Dec-2021 & 31-Dec-2022 EPS & 23 p & 30 p Which of the following statements is an incorrect interpretation of the ratios: EPS relates the after-tax profits generated by the business during a period to the number shares in issue. A company could be reporting a rising EPS even though its earnings are declining. In 2022, the company generated 30 p in revenue for every ordinary share in issue. EPS is considered a useful measure of share performance used by shareholders to assess t investments.

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KevinMaster · Tutor for 5 years

Answer

The statement "In 2022, the company generated 30 p in revenue for every ordinary share in issue" is incorrect.

Explain

## Step1: <br />The Earnings Per Share (EPS) is a measure of the profitability allocated to each outstanding share of a company's common stock. It is calculated as the Net Income After Taxes divided by the Outstanding Shares. The formula for EPS is: <br /><br />### \( \text{EPS} = \frac{\text{Net Income - Dividends}}{\text{Outstanding Shares}} \)<br /><br />## Step2:<br />We use the above formula to evaluate each statement. <br /><br />1. "EPS relates the after-tax profits generated by the business during a period to the number of shares in issue." This is correct as it echoes the formula provided.<br /><br />2. "A company could be reporting a rising EPS even though its earnings are declining." This statement could be true. If the number of outstanding shares decreases at a faster rate than the decrease in net income, EPS can increase despite declining earnings.<br /><br />3. "In 2022, the company generated 30 p in revenue for every ordinary share in issue." This is incorrect. The EPS measures earnings, not revenue. It's possible that while the company earned 30 pence per share, its revenue per share could be significantly higher or lower.<br /><br />4. "EPS is considered a useful measure of share performance used by shareholders to assess their investments." This is indeed correct. Shareholders use EPS along with other financial data to assess the performance of their investments.
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