Which financial performance measure reflects the expectations of stockholders, particularly when managers are compensated with stock options?

Earnings per share (EPS) is a key financial performance measure that closely aligns with the expectations of stockholders, especially when managers have compensation tied to stock options. This measure indicates the portion of a company’s profit attributed to each outstanding share of common stock, providing a direct insight into profitability on a per-share basis.

When managers are incentivized with stock options, they tend to focus on increasing the company’s EPS, as a higher EPS typically translates to a higher stock price, benefiting both the shareholders and the executives holding those options. Consequently, EPS is often utilized by stockholders to gauge a company’s financial health and operational efficiency, making it a crucial metric in evaluating a firm's performance from an investment perspective.

Other performance measures, while informative, do not directly reflect shareholder expectations in the same way that EPS does. For instance, return on investment (ROI) assesses the efficiency of an investment, but may not capture the company’s profitability as perceived by shareholders. The net profit margin shows the percentage of revenue that remains as profit, yet it does not provide a direct link to individual shareholder value. The debt to equity ratio is more focused on the company’s financial structure rather than its profit generation for stockowners. Thus, EPS stands out as the