RESEARCH ON

EARNING PER SHARE

FOOD INDUSTRY OF PAKISTAN

SUBMITTED TO: FARHAN MEHBOB

SUBMITTED BY: M.OWAIS JAFFRI (0695)

IQRA UNIVERSITY NORTH

NAZIMABAD CAMPUS

INTRODUCTION:
Financial ratios not only are used to understand the current and past
performance and future prediction of company, but also they are used as a
tool for planning and controlling the activities of the company. Therefore, the
present study investigates the effect of financial ratios, operating cash flows
and firm size on earnings per share of listed companies in Karachi Stock
Exchange.
For this purpose, a sample of 33 companies has been selected and our data
is cross sectional. We have chosen 2012 as a year to test the research
hypotheses.
In this study, the ratios of profitability (NPM, AT and ROE), liquidity (CR), and
leverage (DTE) are used as the independent variables and the earnings per
share (EPS) used as the dependent variable.
Earnings per share are indicative of earnings that earn each ordinary share
and often are used to assess the profitability and risk associated with profit
and also judgment about stock price.
Users of financial statements allow different levels of importance for financial
ratios. Investors of business unit have special attention to profitability ratios
and among profitability ratios, return on equity ratio (ROE) is more important
than the other ratios from the perspective of investors, because it is
indicative of their investment returns and lower this rate in companies cause
to reduce earnings per share. Thus, they consider tow liquidity and debt
ratios in future considerations.

Holders of debt securities may be more

attentive to debt ratio but we should keep in mind that an experienced

analyst largely considers all financial ratios considering their degree of
application importance.

BACKGROUND STUDY OF EARNING PER SHARE:

Earnings per share are the part of the companys profit that is attributed to
each individual share of stock. Earnings per share are a good indicator of a
companys profitability, and a very important metric to look at while
evaluating a certain stock (William Lasher, 2008).
The formula for Earnings per share is:
(Net Income Dividends on preferred stock)/ (Average Outstanding Shares)
Average Outstanding Shares is used instead of a single number because
Earnings per Share is reported over a certain period of time and the number
of outstanding shares will likely fluctuate in that period, so you can get a
more accurate result by using the average number of outstanding shares.
Earnings per share are considered by most investors to be the single most
important metric to use when evaluating a stock. However, some aspects of
Earnings per share can be misleading when comparing two different
companies. For example, one company could use twice as much capital to
generate the same amount of profit as another, but it is obviously not
utilizing its capital as efficiently as the other company. However, these
numbers are not reflected in the Earnings per share, so it is important to
research on many different metrics when evaluating a company (M Y Khan
and P K Jain, 2007).
There are many different types of Earnings per Share indicators used by
companies. However; the two most important ones are called Trailing

Earnings per share and Rolling Earnings per share. They are easy to learn
and understand.
Trailing Earnings per share is the sum of the companys Earnings per share
for the past four quarters or one year (Stephen H. Penman, 2009)
Rolling Earnings per share is the sum of the Earnings per share for the past
two quarters along with the estimated Earnings per share for the future two
quarters, so it also spans a year (Stephen H. Penman, 2009).

PURPOSE OF THE STUDY:

To investigate the effects of Earnings per share on the other variable those
are Return on equity, asset turnover ratio, debt to equity ratio, net profit
margin ration and current ratio of companies listed on the Karachi stock
exchange.

OBJECTIVES OF THE STUDY:

To determine the relationship between Earnings per share and other variable
those are Return on equity, asset turnover Ratio, debt to equity ratio, net
profit margin ration and current ratio of companies.

LITERATURE REVIEW:
The return on equity is the amount of net income returned as a percentage
of shareholders equity. Moreover, the return on equity estimates the
profitability of a corporation by revealing the amount of profit generated by a
company with the money invested by the shareholders. Also, the return on
equity ratio is expressed as a percentage.
According to our model study the relationship between Earning per share and
return on equity ratio from the data of Food manufacturing industry listed in
the Karachi Stock Exchange for the year of 2012. Results showed that the

relation between earning per share and return on equity ratio have positive
and significant relation.
Asset turnover ratio is the ratio of a company's sales to its assets. It is an
efficiency ratio which tells how successfully the company is using its assets
to generate revenue.
Generally speaking, the higher the ratio, the better it is, since it implies the
company is generating more revenues per dollar of assets. But since this
ratio varies widely from one industry to the next, comparisons are only
meaningful when they are made for different companies in the same sector.
The Asset Turnover ratio is also a key component of DuPont Analysis, which
breaks down Return on Equity into three parts, the other two being profit
margin and financial leverage.
According to our model study the relationship between Earning per share and
Asset Turnover ratio from the data of Food manufacturing industry listed in
the Karachi Stock Exchange for the year of 2012. Results showed that the
relation between earning per share and Asset Turnover ratio have positive
and significant relation.

METHOLOGY:
RESEARCH FRAMEWORK:
The Dependent Variable in our study is earning per share and the
independent Variables are the various factors such as return on equity, asset
turnover ratio, debt to equity ratio, net profit margin and current ratio.

TYPE AND NATURE OF THE STUDY:

Type of our study is quantitative, and we use it to proof the relation between Earning per share
and the factors that influence earning per share.

POPULATION:
All the food sector related company registered in Karachi stock exchange is
the study element of our research.

SAMPLE SIZE:
There are nearly 500 companies listed in Karachi stock exchange, but our
matter of concern is only Food Sector Companies.

STATISTICAL TOOLS:
Data will be analyzed using Eviews and Gretl software and this software are
used in interpreting our result.

CORRELATION COEFFICIENT:
Correlation coefficient, one of the well-known technique use to examine the relation between
independent and dependent variables, as the relation is positive it mean as with the increase of
the particular independent variables there will be increase in dependent variable or as with the
decrease of dependent variable there will be decrease in dependent variables whereas when the
relation is negative so thats mean with increase of independent variable there will be decrease in
dependent variable or vice versa. Their value is between +1 to -1. Positive value represents
positive relation whereas negative value represents negative relation (wikipidia, 2014).

MULTIPLE REGRESSIONS:
Multiple regression, one of the techniques used for the purpose of elaborating the relation
between two or more independent variable with dependent variable, multiple regression is an
equation use to interpret the relation between variables (investopedia, 2015) likewise as
concerned with our research variable we use it to interpret the relation between Earning per share
and the factors that influence positively or negatively on Earning per share.

RESULT
INTRODUCTION
We have select the food industry for creating the cross sectional model
because as we have only one year data of 33 companies and we are
calculating the ratios of the company and from that we will analyze the
model by using Eviews software .
My Dependent variable is Earning per share and independent variables
are Return on equity, debt to equity, net profit margin, current ratio and
asset turnover ratio.
At First we analyze the significant variance in the model by using Eviews

Multi-variant exist in the model because the probability-value of ROE and ATR
is 0.0366 and 0.0392 which is less than 10% it mean that ROE and ATR is
significant variable to explain the Earning per share and second, third and

fifth variable that is DTE, NPM and CR is not significant because the pro-value
of DTE, ROE and CR is 0.2211, 0.5335 and 0.3543 which is more than 10% so
the DTE, NPM and CR is not significant variable to explain the earning per
share.

R-squared
The value of R-square is 39.29% which mean 39.29% variation in earning per
share can be explain, our five independent variable such as NPM, ROE,
DTE ,ATR and CR jointly. The rest means that (100% -39.29= 62%) which
means 61.71% variation in earning per share can be explained by other
variables. Other variables influence the earning per share by 61.71% and
39.29% influence by five independent variables.
This model is not nicely fated because these NPM, ROE, DTE, CR and ATR
influence 39.29% and 61.71% of the fluctuation of earning per share can be
explain by other variable. It mean that outside variable is more influence
then inside variable and R-square value defined joint significant within the
sample.

F-statistic:
The f-statistic value 3.4955 which is less than 10%, it means that the model
is significant or appropriate.

Prob. (F-statistic):
Prob.(F-statistic) value is 0.014509 which is less than 10%, it mean model is
significant so these five variable is jointly influence our dependent variable
that is EPS which is desirable, defined the joint significant of these five
variable in the industry and it is most important (that mean actually what
happened) .

T-statistic and Prob. value Relation:

We always selects the absolute value of t-statistic (means that is no negative

or positive sign) and it has always inversely relationship between the tstatistic and prob. it mean t-statistic value is increase so prob. value is
decrease.

Co-efficient:
The co-efficient of ROE is positive sign which is show direct relation between
return on equity (ROE), and earnings per share (EPS) it means that ROE
increase by 1 unit so EPS also increase by 1 unit.
The co-efficient of DTE is positive sign which is show direct relation between
debt to equity (DTE), and earnings per share (EPS) it means that DTE
increase by 1 unit so EPS also increase by 1 unit.
The co-efficient of NPM is negative sign which is show inverse relation
between and Net profit margin (NPM), and earnings per share (EPS) it means
that NPM increase by 1 unity so EPS decrease by 1 unit.
The co-efficient of DTE is positive sign which is show direct relation between
and Asset turnover ratio (ATR), and earnings per share (EPS) it means that
ATR increase by 1 unit so EPS also increase by 1 unit.
The co-efficient of CR is negative

sign which is show inverse relation

between and Current Ratio (CR), and earnings per share (EPS) it means that
CR increase by 1 unit so EPS decrease by 1 unit.

Heteroskedasticity Test:

Heteroskedasticity does not exist in the model because Prob. chisquare (5) value is 43.57% which is greater than 10% so there is
no error in the model.

Multi-co-linearity Test:

There is no multi-co-linearity exists in the model because centered VIF

minimum value is 1.0216 which is greater than 1.0 it means that model
should not have any serial correlation or auto-correlation .