Relevance of Earnings Metrics: A Comparative Analysis of EPS and CFO on the Pakistan Stock Exchange

Abstract

This paper sets out to examine the information content of earnings per share (EPS) and cash flow from operations (CFO) in companies listed on the Karachi Stock Exchange. The primary aim is to determine whether EPS or CFO provides more relevant and incremental information for investors in predicting stock returns. To achieve this objective, the study analyzes data from 85 companies listed on the Pakistan Stock Exchange over the period spanning from 2008 to 2021. The research evaluates the relative performance of EPS and CFO models in explaining stock returns and assesses which of the two financial metrics carries greater information content. The findings of the study reveal that the EPS model outperforms the CFO model in terms of explaining stock returns. Additionally, the results indicate that EPS possesses greater information content compared to CFO. These findings align with previous research conducted in various countries, suggesting the robustness of the observed relationship between financial metrics and stock returns. This study contributes valuable insights into the relative significance of EPS and CFO as indicators of company performance and their impact on stock returns in the context of the Karachi Stock Exchange. The results underscore the importance of earnings metrics in influencing investor decision-making and highlight the superiority of EPS over CFO in providing relevant and incremental information for market participants.