Final answer:
EPS is an incomplete metric for gauging a firm's health as it omits crucial factors like capital structure and future growth prospects, and is prone to distortion.
Step-by-step explanation:
Earnings per share (EPS) is not a consistently good measure of a firm's performance because it is primarily based on a company's net income rather than the broader context of its financial health. Factors such as the company's capital structure, share buybacks, and non-recurring events can significantly influence EPS, potentially misleading investors about the true economic performance of the business. Additionally, EPS does not account for the investment risk or future growth prospects which are crucial for evaluating a firm's valuation. Financial investors in stocks cannot earn high capital gains simply by buying companies with a demonstrated record of high profits. Instead, stock prices are greatly influenced by market expectations. A high past performance may already be reflected in the stock's current price, anticipating future profits. Therefore, greater capital gains can often be achieved by identifying companies that are currently undervalued by the market but are poised for future success—those considered by analysts to have poor prospects in the present which will later outperform expectations.