In my previous post on capital allocation, I had mentioned SAP as a company which might have overpaid for an acquisition. A reader commented that SAP is a good capital allocator because they increased EPS over the last 10 years.
Increasing EPS itself in my opinion is not a “proof” for good capital allocation. Actually, this itself says nothing at all. If you have a stable business, just retaining earnings and doing nothing will increase EPS as long as interest rates are positive. Good capital allocation is when you create value from retained profits.
The best way to find out if value is created is to look at how returns on equity and return on capital develop over time.
Let’s take a look at SAP over the past 17 years with some per share numbers: