A company's earnings available for common stockholders helps it determine its earnings per share, or EPS, one of the most commonly used measures of corporate profitability. Calculating earnings available for common stockholders isn't complicated; you simply subtract one number from another.
To calculate earnings available for common stockholders, take the company's after-tax profit -- also called net income or earnings -- and subtract any amount of that profit that must be distributed to a senior class of shareholders. Dividends on preferred stock are the most common example of such a distribution. Holders of preferred shares typically get guaranteed dividends, which must be paid before any earnings can become available to holders of common stock.
Say a corporation reports an after-tax profit of $15 million. The company has 1 million shares of preferred stock outstanding, and each preferred share is guaranteed a dividend of 30 cents per quarter. In total, the preferred dividends add up to $1.2 million a year -- that is, $300,000 four times a year. So the earnings available to common stockholders would be $15 million minus $1.2 million, or $13.8 million.
Earnings vs. Cash
The fact that earnings are "available" to common stockholders doesn't mean common stockholders will be getting a check for their share of the profits. For one thing, profits do not necessarily equate to excess cash flow; all sorts of non-cash factors go into calculating a company's profit figure. More important, it's up to a corporation's board of directors to decide how much profit, if any, should go to stockholders in the form of dividends. "Available" mostly means that these earnings can be used to calculate earnings per share.
Role in EPS
Investors and analysts commonly look at earnings per share when evaluating a company's profitability. The "earnings" in EPS is not the company's total earnings but rather the earnings available for common stockholders. Take that figure and divide it by the company's average number of shares of outstanding common stock to get EPS. Corporations must report their EPS figures on their income statements.
- Accounting Coach: Earnings Per Share
- McGraw Hill: Intermediate Accounting -- Basic Earnings Per Share
- "Financial Accounting for MBAs," Fourth Edition; Peter Easton, et al; 2010