Earnings per share (EPS ratio)) refers to the measure of the company's net income, which is theoretically available for payment to the common stock's shareholders. Exxon Mobil’s earnings per share for the last three years was $4.63 in 2017, $4.88 in 2018, and $ 3.36 in 2019. The company’s EPS has a 5.6% increase from 2017 and a 31.15% decline from 2018 ( Macrtrends, 2020) . An increase in EPS in 2018 implies that the company’s earnings increased or the company’s quantity of shares reduced. Usually, the number of shares reduces when the company repurchases its stocks hence raising the EPS ratio. Alternatively, a decline in the EPS ratio implies a decrease in the firm's net income or a rise in the number of shares. A negative trend in 2019 indicates that Exxon Mobil has a small room for increasing the current dividends compared to a rose between 2017 and 2018.
Earnings Quality and Earnings Management
Earnings quality is also called quality of earning. It refers to the percentage of the income that is due to higher sales or lower costs. Earnings management refers to the application of accounting techniques to generate financial statements that present an overall positive view of the company’s business activities and financial positions.
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An example of key areas that can be affected by earnings management is inventory valuation. In some instance, the management of companies uses Last-in first-out (LIFO) inventory management where the newest inventory purchased are sold first while early purchased stocks are sold later (Lara et al., 2020). Exxon Mobil sometimes uses LIFO to increase sales over a short period, thus making shareholders consider the company profitable. Since newly acquired inventory will sell faster, shareholders usually believe that the company’s performance is improving.
References
Lara, J. M. G., Osma, B. G., & Penalva, F. (2020). Conditional conservatism and the limits to earnings management. Journal of Accounting and Public Policy , 39 (4), 106738.
Macrtrends. (2020). Exxon EPS - Earnings per Share 2006-2020 | XOM. https://www.macrotrends.net/stocks/charts/XOM/exxon/eps-earnings-per-share-diluted
