What Is Net Income Applicable to Common Shares?

net income applicable to common share
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DEFINITION
Net income applicable to common shares is the income that could be given to shareholders after taxes, non-controlling interest, and dividends on preferred stock are deducted.

Net income applicable to common shares is the income that could be given to shareholders after taxes, non-controlling interest, and dividends on preferred stock are deducted.

Definition and Examples of Net Income Applicable to Common Shares

Net income applicable to common shares is a figure on an organization's income statement. It tells investors how much income is left over that could be distributed to common shareholders. The figure is also called earnings available for common shares.

It's important to note that there is no gaurantee that a company will distribute all or some of the available earnings. There might be other financial circumstances such as expansions or other large investments a firm might need to make that require leftover capital. The corporation might make it a policy not to pay dividends.

Income statements will not always make it clear how much income is available. In that case, you could check the company's annual filing with the Securities and Exchange Commission, called a "10-K." For example, Ford Motor Company lists net income available for common and Class B shares in the form's notes—there was $17.9 billion available at the end of 2021.

The figure is also the starting point for calculating basic earnings per share and diluted earnings per share.

How Do You Calculate Net Income Applicable to Common Shares?

As shown in the Ford Motor Company example, you can use the value the company publishes in its annual financial report. If the income statement doesn't list the net income available for common, you can use the company's net income and subtract preferred dividends.

For instance, say you owned a business and issued preferred and common stocks. Assume that one year you generated $3 million in revenues and had $1 million in total expenses. You paid $500,000 to your preferred stockholders. In this case, you have $1.5 million in earnings available for common shareholders.

What It Means for Individual Investors

For an investor, net income available to common shares is a chance to receive distributions or dividends if the company issues them. However, companies are not required to pay dividends—unless the stocks are dividend-paying shares. Some corporations do it when they can; some don't pay them at all. Others, like Coca-Cola, always pay quarterly dividends.

You may find it helpful to know how mature the company is when looking for investments that might generate dividends. A young, growing company with a significant income for common shareholders is more likely to reinvest in itself. A more mature company might distribute earnings.

Net income available to common doesn't always mean an excess of cash or capital available for shareholders. For example, a business may have a high income available to common shares. However, if reported earnings for the year were higher than the amount of cash reserves for the year, the company might choose to place the capital into its cash accounts for expenses that require cash.

There are cases where shareholders might be better served. A company's management could use funds to reduce risk by reserving them for other purposes rather than pursuing growth in net income.

Key Takeaways

  • The net income applicable to common shares on an income statement is the income that could be given to common stockholders.
  • Net income applicable to common shares is the amount of capital left after subtracting expenses, taxes, and dividends to preferred shares from earnings for the year.
  • Businesses can choose to use this capital or distribute it to common shareholders.

Article Sources

  1. Ford Motor Company. "Form 10-K For the Fiscal Year Ended December 31, 2021," Pages 110, 129.

  2. The Coca-Cola Company. "When Does the Company Pay Dividends?"