Is it possible (if not, why) to link the earnings per share to the book value per share, profitability........

Question

Is it possible (if not, why) to link the earnings per share to the book value per share, profitability ratios, asset turnover and a measure of leverage????

I think Du Pont analysis may have somthing to do with this...

Answer 1

That's what the Dupont Return on Equity formula does. See link below for derivation of formula.

Answer 2

Book value is total value of assets, earnings are , well, earnings. They are totally different measures of value. You can have a company with vitually no book value, in other words have little in assets but still make money, ie services. So, there really is no positive correlation. However any company with assets may have a potential to make earnings, therefore value investors may look at high book value per share even thought there are no or little earnings. This may portend better days to come, or if new management is formed a better ROA, return on assets may be achieved. However, growth investors tend to focus on earnings only.

An example of a high book value but no earnings may be the oil company not in production. They have a lot of 'proven and probable' resources in the ground as well as equipment. That should technically add to book value. However, if they are not pulling it out of the ground in a profitable fashion, then earnings are negative.

Answer 3

Actually your question is whether earnings and book value show positive or negative correlation. The answer would be not really and it very much depends on your industry.
First of all, look , do you need to have high book value to be profitable or your earnings to grow? Not really. Market factors (demand side) plays a far more important role.

Besides, in some industries book value determines your earnings potential, in others don't/ Think of mining and tourinsm.

Answer 4

It is not possible because share prices are determined by the collective influence of lots of shareholders. Although many of these will trade the shares in such a way that share prices are related to profitability, assets etc there are many others who use many other unrelated factors in their trading decisions such as emotions, technical analysis, insider information (e.g. they think that next years profits will be down). So actual share prices tend to be chaotic.