Learning Curve Theory

A worker is likely to gain experience, become more efficient and faster as they carry out a repeated performance of a job task. Human beings improve skills, gain experience, exposure and specialize as they repeat the performance of a particular task. This is known as the learning curve effect.

A worker with the no previous experience and knowledge is untried the first time they perform a new operation. As the worker repeats the operation and becomes more familiar with it, their labor efficiency increases and their labor cost per unit decreases. After the passage of time, the regular rate of decline in cost per unit is established and used as a basis to predict future labor cost..

The learning process begins at the point the first unit comes off from the production line. And each time cumulative production is doubled, the average taken to produce a unit of cumulative production is a percentage of the average time of the previous cumulative production.

What is the learning curve theory?

The learning curve theory says that whenever a repetitive task is performed, the average time spent to produce a unit falls by a specific percentage as the activity level is doubled. For example, there is a learning phenomenal of 80% for a 20% decline in average time and a 75% learning phenomenal for a 25% decline in average time.

The learning curve is the mathematical expression of the phenomenon that when a complex and labor intensive procedures are repeated, unit labor times tend to decrease at a constant rate.

How To Use Earnings Per Share (EPS) To Make Profitable Investment Decisions.

Before you invest in those stocks, it is important to know if your investment is going to yield the highest profitable returns possible in a chosen sector. The most reliable tool to test for optimal profitability is the Earnings Per Share (EPS) shareholder ratio 

EPS is the most frequently used of all accounting ratios. It ia believed to give the best picture of a company's performance. 

To calculate EPS, divide a company's net profit or loss attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. The net profit or loss attributable to ordinary shareholders is earnings after tax, minority interest and extraordinary items available for equity shareholders.

Every information needed for the calculation of EPS is available in a company's financial statements.

  But the EPS shouldn't be used in isolation to make an investment decision. Other factors must be considered before a final decision is reached. Don't ignore the following factors;

1. Evaluate the policies of companies (operating within the same sector is recommended) on;

A. Depreciation and,

B. Replacement of assets.

2. Compare EPS of a company with the EPS for the same organization in respect of previous years. Repeat the same comparisons over time for all other companies (within the same industry- sector relevance is very important) you have selected to choose from,

3. Company size is also very important. To make a sound choice among companies within a given sector, the EPS of companies of similar size must be evaluated.

Decision- Tje higher the Earnings Per Share , EPS, of a company, the higher is its profitability.