I woke up this morning and as i generally do, i looked at the business news on ABC, and Westpac being in news i could not help but reading more into it(a close relative working for the bank; always makes me curious when the name pops up); so as Westpac releases its financial results showing same profits as last year this time, the investors as ABC news put it "ditched the second biggest home lender."
The accountant in me could not help but prod more into what is it investors generally prefer as a measure of its financial performance. While financial institutions prefer various methods to measure its financial performance, ranging from price-earning ratio, dividend payout ratio, dividend yield ratio and many many more; as seen from the Wespac Interim results 2015 notes, it uses the "cash earning per share" ratio to measure its earnings.
Now the reason why the financial institutions use the cash earning per share ratio is that as the formula suggest:
Cash EPS= Operating Cash flow
Ordinary shares outstanding
As we know operating cash flow is that amount which is actually generated when a particular amount is invested in the business. So from my understanding cash EPS would give the most fair idea to the investors about the earnings per share, also because it considers the diluted number of shares including any convertible share warrants and share options. Investors would be disappointed to see that Westpac shares would not be earning much more than last year interim results.
Now for a new investor like me who is thinking of investing in a financial institution it would be helpful to know the interim results of other banks and then compare the Cash EPS of all of them.
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