(a) Earnings per share including extra items
(b) Earnings per share excluding extra items
(c) Earnings per diluted share including extra items
(d) Earnings per diluted share excluding extra items
Dharmendra Bhatt: CEPS is more important
Rohit Sharma: Diluted EPS after excluding minority interests and extra one time expenses
Sumeet Kapoor: Rohit, would love to understand your rationale behind your recommendation.
Rohit Sharma: I prefer to choose dilute EPS because in some companies due to stock options , or by diluting equity no. Of shares increases so even if the total earnings increases , for the same profit thier would be more shareholders now after diluting equity. Thus …See more
Rohit Sharma: And sorry I mean to say one time profits not one time expenses. We should reduce effect of one time profit (ex. Sale of land). Otherwise it will not give the clear picture of company’s profitability.
Michael C. Williams: It can be folly to exclude special items. Buffet famously said normalized earnings were basically “how well management would have done if they hadn’t done as badly as they did.”
Michael Wei: I have a different perspective on this. I think value investors should use total earnings instead of EPS. This forces you to think of buying the entire business as a whole – as Buffett says, if you’re not prepared to buy the entire business, you shouldn’t even buy a single share. Imagine yourself being a Trillionaire – would you buy this entire business at this price and hold the whole thing for your contemplated holding period?
Sumeet Kapoor: Good point Michael! However, my question was much earlier in the journey of the decision to purchase a stock and/or the entire company. I was trying to get clarification about when Benjamin Graham talks about EPS is he talking about diluted EPS with or without extra items.
Michael Osteen: As you look at a firms numbers never make an investment decision based on only one figure. We typically look at about 120 indicators. As far as EPS we like EPS without NRI.
Sumeet Kapoor: Michael, thank you for your response. Yes, I completely agree with you that Investment decisions should not be based on one figure. My question was specific to a factor used in the initial selection of a set of organizations for further evaluation. What is your rationale behind liking EPS without non-recurring items?
Brooke Washburn: there was a company that someone posted here a while back, I think Beazer Homes. They had some non-recurring items such as a sale of a $X million property, which artificially boosted their EPS by a significantly large amount. Some people on this forum …See more
Brooke Washburn: you exclude non-recurring items to get an idea of the company’s core operating profitability. but you also need to check if “non-recurring” activities are actually recurring in the financial statements
Bailey Brewer: It depends on the company, industry, and extra items.
Sumeet Kapoor: Is it possible for you to provide an example or share conditions under which it will vary by company, industry or especially extra items?
Bailey Brewer: If is restructuring charges, and the company restructures on a regular basis, include them in your analysis. If they are restructuring charges and the company isn’t likely to do that again in the future, don’t include them. I believe research has shown that cash flow is a more reliable indicator than earnings, in no small part due to the total accruals anomaly.
Dharmendra Bhatt: Most important is calculation of risk. In investment management we study so many things which we can not control so I focus on only things which I can control.
Greggory Miller: I agree, that is why I avoid companies that dilute my shares year after year. It makes me angry (No.. furious) that a board would allow this without reason. Even Warren Buffet complained about his own actions where he diluted his shares in Berkshire to purchase a company and how he regretted the decision even though he made a significant return on the investment.