Question

Which of the following reasons best explains why earnings per share (EPS) is such a popular measure to evaluate a company?

Multiple Choice

• EPS makes it easy to compare one company with another.

• EPS is an excellent measure of how efficiently long-lived assets are being utilized.

• EPS provides information that investors can factor into their expectations about future dividends and stock prices.

• EPS provides specific information about the ability of a company to repay its long-term debts.

Answer 1

Option (A) EPS makes it easy to compare one company with another is the correct alternative .

Explanation : EPS is a very useful measure of profitability and it works as a basis for comparing earning power of the companies.

Why the rest of the options are not correct :

B) Fixed assets turnover ratio is an excellent measures of how efficiently long lived assets are utilized not the EPS. At the time of calculating EPS, only net income and number of common stock outstanding are considered, not the volume of fixed assets.

C) Factoring works on dividend per share (DPS) not on EPS. Investors factor their expectations on dividend per share of current year to estimate future dividends and stock prices .

D) Solvency ratio exactly measures the ability of the company to pay it's long term debts. EPS is totally irrelevant in this regards.