Why ROE is more important than EPS (为什么股东回酬率会比每股净利来得重要?)
In order to know which is more superior that another, we should first understand what are Return of Equity (ROE) and Earnings per Share (EPS). Although the writer had explained before, but let’s get a quick recap on what are these values mean. For readers that would like to know more, the writer will post these two links to the articles at the bottom section.
In order to calculate EPS, we must first know the company’s net profit. Net profit can be retrieved by taking its gross profit, deduct all the expenses and costs, where all these values are usually can be taken in quarter reports or annual reports. Then, the net profit will be taken and divided by the total number of shares, which will equal to EPS. On the other hand, ROE is quite similar as it also requires the value of net profit. However, the net profit will not be divided by number of shares, but the shareholder’s equity, which can be found in the balance sheet.
Now back to the question, why ROE shall be prioritized over EPS, or why is ROE more important? This is because EPS tells absolutely nothing about the business itself, but all of its value is only per share basis. On the other hand, ROE is able to show how good is the business’ profitability, and how much is this current business able to generate income in terms of the shareholder’s investment.
Furthermore, a company with high ROE shows that the company has great market domination and pricing power, as they could increase the selling price and the market will still gladly accept, making their return much higher. On the other hand, a positive EPS can only show that the company is earning money but not losing money. However, it does not quite matter whether their EPS is high or low because a company can have very high EPS just because their number of shares is lesser. Hence, ROE is a comparable value with its peer companies because it is calculated in terms of percentage, whereas EPS is not comparable because each company has different number of shares.
However, there is also something to beware when looking at these two values, which is the corporate exercises. If a company has recently complete its corporate exercises such as private placement, bonus issue or right issues, both of their number of shares and shareholders’ equities will be increased, hence bringing their EPS and ROE down. On the contrary, if the company has recently conducted share buy-back, their ROE and EPS will be increased, as lesser number of shares are publicly listed, and ROE does not include any treasury shares.
In short, ROE is not only able to tell a company’s profitability but also financing decision, whether the company is generating a decent return for shareholder or not. On the other hand, EPS technically can only show whether the company is earning or losing money, and to allow investors to calculate their PE ratio, whether they are undervalued or overvalued. Hence, ROE shall be prioritized over EPS when assessing a company.
PE ratio post:
ROE vs ROIC post:
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