c) Limitations of EPS
(i) Not all entities use the same accounting policies. It may not always be possible to make meaningful comparison between EPS of different
entities.
(ii) EPS does not take account of inflation, therefore growth in EPS over time might be misleading.
(iii) EPS measures an entity’s profitability, but this is only part of an entity’s overall performance. An entity’s cash flows can be just as important as its profit (and more essential to its immediate survival). Changes in the value of assets that is holding gains can also be an important part of performance for some entities.
(iv) Diluted EPS is often described as an early warning to investors that the returns on their investment may fall sometimes in the future. However, diluted EPS is based on current earnings, not forecast earnings. This means that it may not be a reliable predictor of future EPS.
(v) EPS is not a complete tool for investment analysis as it cannot provide information on liquidity position of the entity.