How relevant is annualizing EPS based on first quarter reports of commercial banks? Analysis of expected against actual EPS and deviation

Mon, Dec 2, 2019 12:49 PM on Exclusive, Financial Analysis, Latest, Recommended,
How releva...

The Earnings per Share (EPS) published by the companies in their quarterly reports is one of the most accurate financial indicator of the companies’ current and expected performance. The figure gives a general idea to the investors regarding how the company is expected to perform.

Usually, the EPS figure is annualized, meaning, the EPS for that quarter is taken as minimum expected return for the remaining quarters and accordingly the expected EPS for the whole year is calculated. For example: if the quarter end EPS for the first quarter stands at Rs.5, then the annualized EPS will be Rs.20 (Rs.5*4 quarters) based on the reports of the first quarter.

However, annualizing EPS may not always be relevant due to the seasonal nature of some industries which results in varying performance in different quarters. To check the relevancy of annualizing EPS, the annualized EPS based on first quarter reports of commercial banks have been compared with the actual year end EPS. The financials of the previous year i.e. FY 2075/76 have been considered. Commercial Bank sector has been chosen for this analysis due to minimal effect of seasonal nature in the industry.

*Amount in Thousands (unless mentioned otherwise)

Annualized EPS based on the reports of the first quarter have been termed as expected EPS. To off-set the effects of bonus, the net profit of the first quarter was annualized and EPS was calculated, considering the paid up capital at the end of FY 75/76. This figure was compared with the actual EPS reported at the end of the year.

As per the analysis, only eight out of 27 listed commercial banks posted year end EPS lower than the expected EPS, while the remaining banks managed to report a higher year end EPS. The highest difference was seen in the EPS of ADBL which increased by Rs.26.31 from the expected EPS. Similarly, NBL reported a year end EPS of Rs.26.62 against the expected EPS of Rs.37.26. On an average, the expected EPS was Rs.23.36 while the actual EPS was Rs.24.99.

From the data, it can be inferred that most commercial banks performed better than what was initially expected and managed to report a positive deviation while some banks couldn’t perform as expected due to various reasons and reported a negative deviation. Other things remaining constant, considering history as data, a similar analysis can be done based on the first quarter reports of FY 76/77 to accurately calculate the expected year end EPS.