Ann: 2020 Annual Report, page-20

Hi HK1, Thanks.

On the subject of EPS I think that it's a mistake to put too much focus on this number - especially for these two companies, and it's relevance will vary depending on the type of business. Your millage may vary. Income is very important but there's many confounding variables and at a minimum you would need to adjust the EPS to exclude these. Taking the just bottom line number without adjustment is misleading and makes Slater and Gordon's position look worse than it really is.

Traders like EPS because it's an easy metric to calculate and compare over large numbers of companies on what appears to be a like-for-like basis but it can be very misleading. Shine's actually a good example of that. Why?

Well if you remember back in early 2016 when the SHJ share price crashed due to a large impairment to WIP and in the HY15 accounts the company had posted an EPS of 0.77 cents - down from 7.73 in HY14! In real terms however the company's profitability hadn't changed, it's just that the pre-HY15 numbers were overstating income. Because of the way WIP accounting works there's inherent subjectivity in the income numbers and we're trusting the companies to guestimate how many cases they're going to win. They're incentivised to be optimistic and over-inflate the numbers right up until the point where they get caught and the house of cards crashes (as it did). Given that both companies were given a good smacking for stuffing this up back in 2015/16 it's likely that they're being conservative at the moment but when the memory fades it's possible that overconfidence will set in again down the track.

For these two companies if you want to take a shorthand approach and just get a quick comparison then it would be better to look at "operating cashflow per share" instead since this cuts out much of the nonsense. Of course a real analysis would also look at income, but don't put too much focus on just the bottom line numbers.