The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 16

NET INCOME, RETAINED EARNINGS, EQUITY, AND EARNINGS PER SHARE (EPS)

The All-Important EPS

When it comes to evaluating a company’s financial performance, without question the most focused on and analyzed financial results relate to the company’s net income and earnings per share (EPS). While other measurements and results may be emphasized and highlighted by parties, including Wall Street’s fixation on net sales revenue, financial analyst’s focus on earnings before interest, tax, depreciation, and amortization (EBITDA), and others, sooner or later, everyone ends up at the same place. How much profit or loss did the company generate? What were the earnings generated per share? Google’s second quarter 2013 results’ announcement highlights its key operating metrics with revenue, net income, and EPS being the focal point.

Two things you notice about Google’s second quarter results are as follows. First, Google prepared the announcement and has specifically focused on performance measurements that are important to the industry. For example, in the web/Internet/social media world, the concept of TAC (traffic acquisition costs) is extremely important as this is a key measurement of how much it costs these companies to acquire customers. There is no doubt that this is an important figure but remember also that when the companies report earnings, they often will emphasize (and we use this term carefully) results that tend to be more positive and de-emphasize results that may not ...