By 2001, Emerson Electric Company (EMR) had reported increasing earnings per sha
ID: 2591404 • Letter: B
Question
By 2001, Emerson Electric Company (EMR) had reported increasing earnings per share for more than 174 consecutive quarters, longer than any other firm.
1. How many years is this? So this started when?
2. How likely is this trend? Why?
3.How could Emerson have accomplished this feat, then? Give me at least 5 reasons that would produce this result. And you know what handy hints I would give you to think this through…
4. Do EPS amounts necessarily indicate how effectively a firm is managing its resources? Why or why not? What might be a better indicator for effective use of resources? Explain.
Explanation / Answer
1. EMR has reported increasing earnings per share for more than 174 quarters, given there are 4 quarters in a year this is 43.5 years (174/4). So this trend started before 1958.
2. This trend looks highly unlikely that the company has shown an increase in EPS for >40 years which means across business and market cycles the company seems to have always had an increased earnings compared to the previous quarter which is highly unlikely
3. a. The company could be decreasing the number of shares outstanding in the market which means earnings per share will go up by share buybacks
b. The company could be deferring losses to later accounting years in order to artifically inflate their income (earnings)
c. The company can increase its profit margin by cutting down costs, so that even if revenue doesnt increase it can generate higher earnings
d. Company could be artifically increasing earnings at end of quarter to boost reported EPS numbers
e. Reverse stock split to decrease of number of shares outstanding which increases EPS
4. EPS is not an effective indicator of firm health as it doesnt take into account- earnings quality, debt level, cash flows, earnings growth potential, margin of the firm
Return on capital employed, Cash flow analysis, EBIT, interest coverage ratio, ROA, ROE- all these measures give a better indication on firm health and how effectively it is managing it's resources
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