Skip to main content

Essential Takeaways From Chapter 12 of The Intelligent Investor: Things to Consider About Per-Share Earnings

Chapter 12 of "The Intelligent Investor" by Benjamin Graham focuses on per-share earnings and what investors should consider when evaluating this metric.

What Per-Share Earnings Mean

Per-share earnings is a company's net income divided by the number of outstanding shares. This metric can be useful for evaluating a company's profitability and growth potential, but it is important to consider other factors as well.

The Importance of Comparing Per-Share Earnings

Graham emphasizes that it is important to compare per-share earnings across different time periods and with other companies in the same industry. This is because changes in the number of shares outstanding can significantly impact per-share earnings.

For example, if a company issues more shares, its per-share earnings will decrease, even if its net income remains the same.

Some industries naturally have higher or lower profit margins than others, so comparing a company's per-share earnings to other companies in the same industry is important.

The Pitfalls of Focusing Solely on Per-Share Earnings

Graham also warns against focusing solely on per-share earnings as a measure of a company's success. For example, a company may have high per-share earnings but also carry a large amount of debt, which could indicate financial instability.

Additionally, a company may have lower per-share earnings but be investing heavily in research and development, which could lead to significant growth in the future.

Investors should also look at a company's growth potential when evaluating per-share earnings. A company that is reinvesting its earnings into research and development or expanding its operations may have lower earnings per share in the short term but may be poised for strong growth in the future.

Dilution and the Impact on Per-Share Earnings

Graham also discusses the concept of dilution, which occurs when a company issues additional shares or stock options to employees.

This can impact per-share earnings because the net income is now spread across a larger number of shares. Graham suggests using the diluted earnings-per-share metric, which takes into account the impact of dilution on per-share earnings.

Adjusting Per-Share Earnings for Inflation

Graham notes that it is important to adjust per-share earnings for inflation when comparing them across different time periods. This is because inflation can erode the value of earnings over time, making them less meaningful. By adjusting for inflation, investors can get a better sense of a company's true growth and profitability.

In addition to these considerations, investors should also look at a company's management team and overall financial health when evaluating per-share earnings. A strong management team with a track record of success and a healthy balance sheet can indicate that a company is well-positioned for long-term success, even if its per-share earnings are not currently very high.

Conclusion

Chapter 12 of "The Intelligent Investor" emphasizes the importance of understanding and comparing per-share earnings when evaluating a company's financial health. However, investors should also consider other factors, such as debt levels, research and development investments, and the impact of dilution on per-share earnings.

Additionally, it is important to adjust for inflation when comparing per-share earnings across different time periods.



Labels:

Comments

Post a Comment

Popular posts from this blog

DoNotPay: The World's First AI Lawyer Providing Affordable Legal Assistance to All

Artificial intelligence (AI) has revolutionized the way we interact with technology, from smart home devices to personalized recommendations. Now, AI is transforming the legal industry with the introduction of DoNotPay, the world's first AI lawyer. Created by entrepreneur Joshua Browder, DoNotPay aims to provide affordable legal assistance to people who cannot afford traditional legal services. In this article, we will explore how DoNotPay works and how it can benefit users. What is DoNotPay? DoNotPay is an AI-powered chatbot that provides legal services. The platform uses natural language processing and machine learning algorithms to understand users' legal issues and provide personalized advice. DoNotPay is accessible through its website or mobile app and is available 24/7. How Does DoNotPay Work? DoNotPay works by asking users a series of questions about their legal issue. The chatbot uses natural language processing to understand the user's situation and provide persona...
Post a Comment
Read more

Essential Takeaways From Chapter 18 of The Intelligent Investor: A Comparison of Eight Pairs of Companies

In this chapter, Graham compares eight pairs of companies. Graham uses practical examples of companies and sets them side by side to show the strengths and weaknesses of each firm, and to provide instructional advice as he did in his teaching days. Instead of reviewing each of the eight pairs of companies, this article will highlight the major points of each pair and provide broad advice from Graham's work. The first pair of companies compared are the Real Estate Investment Trust and Realty Equities Group of New York , which have similar names but are different in the market. The Trust is long-established and appropriately leveraged, while the conglomerate is highly leveraged by almost 10x the amount of the Trust. While Wall Street was in love with the fluffy valuations the market was set for the conglomerate, the Trust was the one delivering value. Mr. Market eventually realized that the conglomerate was overvalued based on its earnings and assets, leading the conglomerate to trad...
Post a Comment
Read more

Essential Takeaways From Chapter 13 of The Intelligent Investor: A Comparison of Four Listed Companies

The 13th chapter of "The Intelligent Investor" presents an analysis of four companies to provide practical insights. Graham bases his analysis on four prevalent live examples at the time of writing, including: ELTRA Corp Emerson Electric Co. Emery Air Freight Emhart Corp. Graham explains that the most striking fact about these companies is that the current price/earnings ratios vary more widely than their operating performance or financial condition. He further clarifies that this happens because of the "superior growth" of the profits of the favored companies. Graham analyzes these companies by looking at key ratios that relate to performance and price. He establishes six criteria for analysis: profitability stability growth financial position dividends price history Graham concludes that careful investors should avoid overenthusiasm for good performance in earnings and in the stock market. Graham considers Emerson Electric to be a "goodwill giant" and em...
Post a Comment
Read more