Why are the handbook rules for the calculation of Earnings Per Share (EPS) so conservative?
EPS is the only ratio that appears on the face of the financial statements. If the financial statements are audited, so is the calculation of the EPS. The goal is to make the EPS figure come out to the lowest possible number, assuming that all dilutive securities would be converted to common shares. Stock analysts and investment organizations often quote EPS numbers as the predominant measure of the financial performance of the company, at the exclusion of a lot of details supporting the level of changes in that ratio from the last figures published. Tied into the EPS ratio is the Price Earnings Ratio or P/E ratio which is quoted along side the EPS. P/E is a yardstick for the potential investor to asses expectations of earnings in the future and also to measure the risk of owning the stock. In view of what are often limited amounts of tools used in the communication of the financial performance of the company, it is wise to want to report the most conservative figure possible in order
