“Earnings per Share (E.P.S)” is very important item through which the performance of companies Y-o-Y is analysed. We often talk about good E.P. coupled with higher growth as a comfortable investing philosophy. Here, when we talk about growth, we mean growth in Revenues and Profitability. The way to measure profitability is actually, Not the PAT of company but instead EPS. Due to changes in Capital Structure (i.e. issuing new equity), PAT might still grow but issuance of equity will still lead to lower profits per share i.e. EPS.

Hence, for us EPS growth is very important to understand and to analyse how much profits are grown each year on per share basis, have a look at the EPS growth of Ratnamani Metals:

We see huge growth story for RMTL. Its EPS have very high growth CAGR of 15.51% from 2011 till 2020. This has added to shareholders value and shareholders are rewarded with high stock returns.

Now, we know EPS have grown phenomenally. We see some years where EPS growth Y-o-Y were very high at 66.66% in 2019, whereas they were also negative in 2017 -11.51%. What drives this EPS growth?  EPS growth is due to reasons like Volume Growth, Price Growth and Lower Costing due to Operating & Financial Leverage. Let me show you the breakup of EPS growth across years:

From above, when EPS grows due to Volume followed by Pricing, it is said to be highly reliable and sustainable. The case of Operating Leverage and Financial Leverage is only limited to certain extend beyond which they do not contribute much to the growth of EPS.

We know in Steel Pipes & Tubes business, pricing growth is not in our hand and it depends on market demand and supply forces. Hence, the most reliable and sustainable from of growth for steel pipes comes from Volumes. When we closely look at EPS growth and its drivers, we will understand how over the years the growth in EPS have come from. Look at the details in table below:

What we see that over the years, Only Volumes Sale have been consistently on rise. As said, pricing (i.e. Realizations), is not consistent and hence not in company’s control. For Operating Leverage we already analysed Raw Material as % of Revenue over the years (industry analysis), where we understood that the rise/fall in R.M prices are not passed on to clients and borne by company itself. Hence, the advantage of operating leverage is volatile and depends on raw material pricing. Financial Leverage impact is very limited and in case of RMTL, the advantage only exists when debt funding is higher leading to better capital allocations.

Hence, in a nutshell, Volume Growth is most stable, reliable and major driver of earnings growth. Whereas, the advantages coming from Pricing Growth, Operating Leverage (RM Costing) and Financial Leverage (when debt level are reasonable) are not so consistent and depends on uncontrollable factors like demand-supply for Raw Materials and Finished Goods Pricing.

Thank You!!

Disclaimer: Views are personal and presented through independent research. By no means there is any stock advice. Also, presented content is for learning purpose only. I might be wrong in presenting data and inaccurate data, let me know if you find any discrepancies.