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


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

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NelsonProfessional · Tutor for 6 years

Answer

The first and Third statements are incorrect interpretations of the EPS. The second and Fourth statements are correct.

Explain

## Step1: <br />"EPS" stands for Earnings Per Share. It is a measure of how much profit a company makes for each share of its stock. It's the part of a company's profit allocated to every outstanding share of common stock. <br /><br />### EPS Formula:<br />The formula to calculate EPS is given by:<br /><br />### \[ \text{EPS} = \frac{\text{Net Income - Dividends on Preferred Stock}}{\text{Average Outstanding Common Shares}} \]<br /><br />The EPS as given in the statement is 30p for the year 2022. This represents the profit made by the company per outstanding share, not the revenue generated per share as mentioned in the first statement. Therefore the first statement is incorrect.<br /><br />## Step2: <br />The second statement correctly defines the EPS ratio. EPS relates a company's after-tax profit not to revenues, but to the outstanding number of shares. The agency uses EPS as an indicator of a company's profitability. So, the second statement is correct.<br /><br />## Step3:<br />The third statement about the possibility of a company with rising EPS and declining profits can be correct in certain cases. This is possible when the number of outstanding shares is decreasing at a faster rate than the decrease in net income. Companies may do this sometimes by implementing share buyback programs. So, the third statement is also incorrect that is generally over conflict situation.<br /><br />## Step4:<br />The last statement is that '(EPS) is considered a useful measure of share performance....' EPS is indeed a good measure seeing how is a company dong from and investor's perspective seeing the shares in favor to profits, it gives them an idea of how much profit they can make for every share they own. Therefore this statement is accurate.
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