It’s Time to Dump EPS as an Indicator of Profits for Something Better
Today we say thanks, and good-bye to earnings per share. It’s time we move into a new century and make investment decisions with harder working number…
Net Operating Profit after Taxes or “NOPAT” represents the true profitability of a business. It shows us how much money the company is actually making.
NOPAT isn’t a number you will find in a company’s reported earnings, but it’s a number that is fast becoming the new standard of measuring performance.
Why Earnings Per Share is Dangerous and Incomplete Information
EPS was a simple calculation for a simpler time. It’s an abacus in an age of super-computers. Today we have constant changes and interpretations to tax laws that make it easy to hide the actual results. This makes a confident decision using EPS nearly impossible or a guess.
Smart investing requires a complete answer, not a quick one because it’s simple. Imagine starting a hike with nothing more than an arrow pointing into the woods. The direction is correct but the depth of the answer leaves you exposed, NOPAT is your investing GPS.
How is NOPAT Different from Reported Earnings or EPS?
In 2013, the Allstate Corporation (ALL) reported earnings of $2.3 billion, a decrease from 2012 earnings of over $100 million, while New Constructs’ calculated NOPAT for 2013 was $3.0 billion, an increase from 2012 of almost $500 million. The main reason for the difference is a one-time loss on the sale of assets in 2013.
New Constructs’ NOPAT value doesn’t include one-time losses and other non-recurring charges because they don’t represent the true, on-going profitability of the business.
Knowing that ALL was in fact becoming more profitable, New Constructs clients who purchased ALL at $41.83/share at the beginning of 2013 were able to achieve a 30.38% return over a year and a 42.74% return over eighteen months. NOPAT drives value.
Reported earnings and EPS are the most widely used performance metrics, but as shown in the case of ALL, they don’t tell the whole story. As an investor, you don’t want to be the one without all the information. And now, you don’t have to be.
An Easy Way to Test-drive NOPAT Numbers for the Stocks You Currently Own
Information without validation is simply an opinion. We invite you to plug your stocks into our pre-built portfolio screener and discover the NOPAT results that are only one part of the research reports member receive.
Become a subscriber today, click here to begin your free membership and see what NOPAT numbers are waiting for you.
New Constructs reviews thousands of SEC filings, so you don’t have to. We calculate NOPAT for over 3,000 companies. Get access to them all by starting your membership today.
Leave a Reply