Net Income Available to Common Stockholders
The Profit Belonging to a Company's Common Shareholders
Net Income (Common Stockholders) - also called net income applicable to common shares or earnings available to common shareholders - refers to the portion of a company’s net profit that belongs to its common stockholders. In practical terms, it represents the income left over for common shareholders after all expenses, taxes, and any obligations to preferred stockholders have been accounted for. This figure appears on the income statement (or in the notes) to show how much of the period’s earnings could be attributed to common shareholders.
How It’s Calculated
Calculating net income available to common stockholders is straightforward. You start with the company’s total net income and subtract any dividends owed to preferred stockholders for that period.
This adjustment reflects the fact that preferred shareholders have a priority claim on a fixed amount of the earnings before common shareholders get anything. If a company has no preferred stock, then all of its net income is attributable to common shareholders. It’s important to note that common stock dividends are not subtracted in this calculation, as they are discretionary distributions from these available earnings, not an expense.
Relationship to Earnings Per Share (EPS)
Net income available to common shareholders is the starting point for calculating a company’s basic and diluted Earnings Per Share (EPS). EPS represents the profit per share of common stock and is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding. A higher net income available to common directly leads to a higher EPS. It’s important to distinguish that net income (common) is a total dollar amount, whereas EPS is a per-share metric.
Why It Matters to Investors
This metric plays a key role in financial analysis and is closely watched by investors. Some reasons it’s important include:
- Indicator of True Earnings: This metric tells common stock investors how much of the company’s profit truly belongs to them, stripping out amounts earmarked for preferred shareholders.
- Basis for Dividends and Retained Earnings: It represents the pool of earnings from which dividends to common shareholders can be paid or that can be retained for growth. Investors often examine this number to judge dividend sustainability.
- EPS and Valuation Metrics: As noted, this figure is used to calculate EPS, which in turn feeds into valuation ratios like the Price-to-Earnings (P/E) ratio. Therefore, it has a direct impact on stock valuation.
- Comparability and Equity Analysis: When comparing companies, especially those with different capital structures, looking at this figure helps provide an “apples to apples” view of earnings available to common owners.
Simple Example Calculation
Let’s walk through a simple numerical example:
Key Takeaways
Net Income to Common Stockholders is the profit that truly belongs to common shareholders after all expenses, taxes, and preferred dividends have been paid.
It is calculated with the formula: Total Net Income - Preferred Dividends.
This figure is the numerator used to calculate the crucial Earnings Per Share (EPS) metric.
It provides a clear view of the earnings available to pay common dividends or to be reinvested as retained earnings.
For companies with preferred stock, this metric is a more accurate indicator of profitability from a common shareholder's perspective than total net income.
Net Income Available to Common Stockholders
The Profit Belonging to a Company's Common Shareholders
Net Income (Common Stockholders) - also called net income applicable to common shares or earnings available to common shareholders - refers to the portion of a company’s net profit that belongs to its common stockholders. In practical terms, it represents the income left over for common shareholders after all expenses, taxes, and any obligations to preferred stockholders have been accounted for. This figure appears on the income statement (or in the notes) to show how much of the period’s earnings could be attributed to common shareholders.
Table of Contents
How It’s Calculated
Calculating net income available to common stockholders is straightforward. You start with the company’s total net income and subtract any dividends owed to preferred stockholders for that period.
This adjustment reflects the fact that preferred shareholders have a priority claim on a fixed amount of the earnings before common shareholders get anything. If a company has no preferred stock, then all of its net income is attributable to common shareholders. It’s important to note that common stock dividends are not subtracted in this calculation, as they are discretionary distributions from these available earnings, not an expense.
Relationship to Earnings Per Share (EPS)
Net income available to common shareholders is the starting point for calculating a company’s basic and diluted Earnings Per Share (EPS). EPS represents the profit per share of common stock and is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding. A higher net income available to common directly leads to a higher EPS. It’s important to distinguish that net income (common) is a total dollar amount, whereas EPS is a per-share metric.
Why It Matters to Investors
This metric plays a key role in financial analysis and is closely watched by investors. Some reasons it’s important include:
- Indicator of True Earnings: This metric tells common stock investors how much of the company’s profit truly belongs to them, stripping out amounts earmarked for preferred shareholders.
- Basis for Dividends and Retained Earnings: It represents the pool of earnings from which dividends to common shareholders can be paid or that can be retained for growth. Investors often examine this number to judge dividend sustainability.
- EPS and Valuation Metrics: As noted, this figure is used to calculate EPS, which in turn feeds into valuation ratios like the Price-to-Earnings (P/E) ratio. Therefore, it has a direct impact on stock valuation.
- Comparability and Equity Analysis: When comparing companies, especially those with different capital structures, looking at this figure helps provide an “apples to apples” view of earnings available to common owners.
Simple Example Calculation
Let’s walk through a simple numerical example:
Key Takeaways
Net Income to Common Stockholders is the profit that truly belongs to common shareholders after all expenses, taxes, and preferred dividends have been paid.
It is calculated with the formula: Total Net Income - Preferred Dividends.
This figure is the numerator used to calculate the crucial Earnings Per Share (EPS) metric.
It provides a clear view of the earnings available to pay common dividends or to be reinvested as retained earnings.
For companies with preferred stock, this metric is a more accurate indicator of profitability from a common shareholder's perspective than total net income.
Related Terms
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