Stock splits don’t change the value of a company much. After a 2 for 1 split, there are now twice as many shares out there, but they are worth half as much per share, so the total stays the same. (There actually is some change…the share price usually ends up slightly above half of what it was, because with the per share price being lower increases demand a little, but we can ignore that here).

Now we can do a little thought experiment. Suppose Apple decides that they want their shares down around $20, so they do a 6:1 split. Every Apple investor ends up with 6 times as many shares as they now have, but the shares are worth $20 each instead of $120 each. And now imagine Microsoft and Apple have exactly the same performance next quarter that they had last quarter, so they end up with the same revenue, sales, expenses, profit, etc.

Microsoft again gets EPS of $0.39/share. Apple’s EPS would now be $0.22/share.

If you think of a company as a pizza, and a share of stock as a slice of pizza, EPS is like how much cheese is on a slice. If someone tells you a slice of Pizza Hut pizza has more cheese per slice than a slice of Roundtable Pizza. Does that mean Pizza Hut is more generous with the cheese? You can’t say based just on the CPS (cheese per slice). Maybe the Pizza Hut pizza was a large, and the Roundtable was a small? Maybe Pizza Hut cut the pizza into four slices, and Rountable cut it into 12? What you’d need to compare to tell which is the cheesier pizza is the cheese per square inch.

When I say that it is completely meaningless to compare EPS between two companies, I don’t mean that EPS is not useful *when* *combined* with other information. If you combine it with some other statistic that is based on number of shares, in a way that the number of shares factor goes away, you can then get a meaningful comparison. If you check back at the references you have been using, I think you’ll find any example where they use EPS as part of a comparison of performance between different companies involves using it in a calculation with some other share-based statistic.

(Well, there is one situation where comparing EPS alone will tell you something useful: if company A’s EPS is positive and company B’s is negative, you can conclude A did better than B!)

That’s the best I can do to explain this. You are obviously a smart guy, so if this doesn’t do it, then I suck at explaining, and hopefully someone else who is better than me will jump in.

Of course that’s wrong, because 1 dollar does not equal 1 yen. You have to apply a conversion.

You have to do the same thing with shares. If you want to compare any share-based statistic across companies (as opposed to with past quarters or years of the same company), you need to apply a conversion factor to take into account that the companies have a different number of outstanding shares.

Go back to about.com’s page on EPS, and click the link there on why share price doesn’t matter. The arguments there apply equally well to any per share statistic.

From About.com

“For example, companies A and B both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stock do you want to own?

It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.”

So EPs is neither meaningless, and is a valid comparison tool. Again – I wasn’t making actual comparison – just demonstrating the point that one company is seen as better at making money than another. I think for shareholders EPS is a valid concern. Every disctionary definition of EPS says it’s a valid and important benchmark of profitibality.

You’ll have to forgive me. I’m sure you know what you’re talking about, but every dictionary and refrence site I’ve looked up researching this article and in response to your post says it’s a valid way to compare companies. I’ll have to give the trusted online references the benefit of the doubt.

It’s not even like the point I was making was wrong. I don’t think anyone in the the market considers Micorosoft a better bet than Apple right now.

And another thing….

Number of employees is not a fair metric as Apple owns retail stores and therefore a disproportionate extra number of lower-paid. employees.

As for your other example, that’s just silly. You’ll never get $1000 of earnings unless there’s a share buyback. As a shareholder you don’t actually get anything of the companies profits, this makes no sense.

As i said numerous times I was making a symbolic comparison, which i believe based on my research an numerous online examples is a fair point. Obviously you disagree and that’s your right but I don’t agree with your logic or your dismissal of what is written in various places.

Again, numerous online refrences say EPS is a reasonable way to determine the PROFITIBALITY of companies. Which is what I was doing. I said before and I’ll say it again. I’m giving them the benifit of the doubt.

B’s EPS will be 1/10th A’s EPS.

See the problem with comparing EPS across companies now? A has sliced their company into 1 million pieces, B has sliced theirs into 10 million. B’s share price will be about 1/10th of A’s.

(This is also why it is wrong to compare share prices. People often assume that if company A is $100/share and company B is $10/share, it must mean A is making more than B, or is bigger than B, or has more sales than B).

If you divide EPS by share price, you’ll get a number that is somewhat reasonable to compare across companies. Equivalent, but easier to work with and understand, is to ask how much you’d have to spend to get $1000 of earnings. That’s a valid way to adjust for size.

Using your numbers, and the most recent closing stock prices, you’d have to buy $50k worth of MS stock to earn $1000 a quarter at the EPS you cited. You’d have to buy $75k worth of Apple stock to earn $1000.

Another way to compare companies that takes into account size differences is to look at earnings per employee. Apple was about $138k/employee over the last year. Microsoft was somewhere around $190k/employee.

The lesson to take away from this is that any financial statistic whose value depends on the number of shares outstanding should not be used to compare different companies.

“EPS serves as an indicator of a company’s profitability…..

…Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component of the price-to-earnings valuation ratio. ”

I would hardly consider that “meaningless”

The point i was making was to illustrate that adjusted for size (with microsoft being a much larger company) Apple punches far above its weight when it comes to making a profit. While it may not be fair to use EPS to calculate an exact ratio of success for evaluation purposes, or that the number of shares each company has could be used as an accurate way to measure their size, my use of EPS was merely to illustrate the point, which I thought was pretty obvious from the post to begin with