“Avoid investing in Company XYZ”, a friend advised me a few years back as the company had displayed negative EPS consistently over the last 3 years. This was strange, as the company had a solid business model and was well-placed in a booming sector, commanding a higher valuation

Further research suggested that XYZ generated most of its sales using the subscription model, which led to a huge pile of Deferred Revenue on its balance sheet, with no revenue recognition for that period. No other major red flags. It was a matter of time before XYZ turned profitable, and indeed, it did.

Yet, our never-ending fixation with the bottom line has led to error-ridden investment decisions and missed opportunities over the course of history.

EPS can be increased using share buybacks, without any real improvements in underlying business value

Net Income can plunge due to a one-time expenditure, though the company is profitable on an operational level

Also, let’s not forget the accounting manipulations. Profits ≠ Cash Flows

Sure, net income is important, but its real use is amplified only when used in conjunction with other equally-important parameters.

It is time, we realize that, for the amount of value provided, EPS is overrated.