Earnings available for common stockholders

Earnings available for common stockholders is net after-tax profit, minus any preferred dividends. For example, a business reports net after-tax profit of $100,000 and also pays a $10,000 dividend on its outstanding preferred shares. This means there are $90,000 of earnings available for common stockholders.

Theoretically, the remainder represents the amount of earnings that a business could pay out to the owners of its common stock. However, the reported amount of earnings may be higher than the amount of cash reserves of the business, so the firm might not actually be able to issue the indicated amount to shareholders.

The measure is more relevant in industries that do not require large investments in working capital or fixed assets, such as the service industry. Conversely, when large investments are required, the calculated amount of earnings available for common stockholders may not be payable at all, and in fact the business may be adding debt in order to better fund the needs of the organization.

The measure is especially not useful when a business is growing rapidly, since the entity will need all of its cash (and more) to fund the increased amounts of receivables and inventory that accompany growth.

Related Courses

The Interpretation of Financial Statements