EPS and PE Calculations Wyman, Article Review

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50, this "would indicate that the company really lost $0.50 of cash per share vs. The reported $1.00" (Wyman 2009).

A company could very easily show a positive EPS because of a one-off sale of an unprofitable venture. But if the company did not change its poor management policy, or was in a poorly-performing sector of the economy, this would not bode well for investors in the coming years. Thus, industry trends are another potential guideline for investors. Even if a company posts a strong showing one year, this is no guarantee that the trend upward will continue, if it is located in a potential 'black hole' of the economy. For example, a luxury company might sell off a division of its holdings, and post strong earnings, but if its core operations were showing a loss, this would be even more troubling for investors than if the company was part of a healthier sector of the economy. A luxury business many not flourish in the current cautious and pessimist economic environment.

Wyman does not use a specific, real-world example to illustrate his points. This is one critical weakness of his article, given that there are so many real-world examples of companies that have borrowed too much to show inflated earnings, or companies that are using borrowed funds or funds earned from selling off critical assets to boost their apparent earnings. Wyman also only includes a cursory discussion of how price to earnings (P/E) as an estimated forecasted are useful when deciding to invest in a company.

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The reason Wyman shies away from specific examples may be that he wishes to give generalized advice that is useful for investors under all economic conditions. For example, a company may be in a relatively positively-performing industry during an expansionary phase of the business cycle, which means that its EPS might need to be viewed with less suspicion than one in a relatively weak industry, during an economic downturn. Additionally, "a negative cash flow may not necessarily be illegitimate" if the entire industry is generating negative operating cash flow "due to cyclical causes" (Wyman 2009). This may be the case with a retail operation that makes the bulk of its revenue during the Christmas season. For a truly holistic evaluation, an investor must also consider how a company spends its revenue, as well as how much it has borrowed and spent. Operating cash flows may be negative because a developing company is investing in critical research and development. New technology and infrastructure may result in cost saving later and marketing to promote the product may generate revenue gains in the upcoming years.

"Evaluating trends will also help you spot the worst case scenario, which occurs when a company reports increasingly negative operating cash flow and increasing GAAP EPS. As discussed above, there may be legitimate reasons for this discrepancy (economic cycles, need to invest for future growth), but if the company is to survive, the discrepancy cannot last long. The appearance of growing GAAP EPS even thought….....

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