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Regarding "Instead of EPS, we should be talking about earnings per dollar of market cap", isn't that what the P/E ratio measures? Although, strictly speaking y
by derriz 8y ago
Regarding "Instead of EPS, we should be talking about earnings per dollar of market cap", isn't that what the P/E ratio measures? Although, strictly speaking you are suggesting the reciprocal - an E/P ratio.
I believe P/E ratios are far more widely used for comparing companies.
EPS isn't a completely useless measure - it can be useful to shareholders in the specific company to provide some anchor for judging dividend policy and for comparing performance over time for that particular company.
But I agree that EPS is a useless measure for comparing different companies.
- __blockcipher__ 8y agoWe should never be talking about earnings per dollar of market cap (PE, as you've correctly noted) - the far superior metric is fcf per dollar of market cap. (Even FCF isn't a flawless metric, since it can be affected by one-offs, but those are generally easy to account for, whereas earnings being a pure accounting metric is vulnerable to all kinds of fuckery)
- pouetpouet 8y agocan you expand on that? Is FCF free cash flow?
- __blockcipher__ 8y agoYes. Let me know if you want me to like actually expand on it (versus just wondering what FCF stood for)
- pouetpouet 8y agohow is FCF (normalized per market cap) a better metric? What kind of fuckery is P/E vulnerable to?
- __blockcipher__ 8y agoSorry I’ve been swamped so i can’t actually do reaearch and give a full response so I’ll start with a tldr and hopefully come back and give you a real answer later: earnings are an accounting measure and there’s some flexibility as to whether a given expense is classified as capex, opex, r&d, etc each with different earnings implementations. In general I prefer cashflow to earnings for that reason. The next point is cash flow vs free cash flow, fcf factors in capex, etc giving you an accirate idea of how much capital is free to distribute to shareholders (free meaning available). As one example, look at tsla’s financials. Their gross margins / earnings paint a way better picture than their fcf, because they engage in all the accounting practices that I vaguely referenced above
- pouetpouet 8y agothank you for taking the time to write this