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Net Income Applicable to Common

Investing Lesson 4 - Analyzing an Income Statement

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net income applicable to common

Net income applicable to common represents the profit generated by a business for the common stockholders (the owners). Good businesses generate ever-increasing piles of cash but, most importantly, have good returns on assets and equity.

Net Income Applicable to Common Shares
The net income applicable to common shares figure is the bottom-line profit the company reported that belongs to its stockholders (owners). It is the starting point for calculating the earnings per share figure you always hear about on the news or in annual reports. To get the basic earnings-per-share (Basic EPS), analysts divide the net income applicable to common by the total number of shares outstanding.

The last line, at the bottom of the income statement is the amount of money the company purports to have made (net income, total profit, or reportable earnings ... it's all the same). Hence the cliché, "what's the bottom line?"

Many people mistakenly believe that a higher net income figure each year means the company is doing well. The problem with this approach is that it ignores changes in capital at work. In other words, if the company's Board of Directors push for the firm to issue lots of new stock and they double the total money at work in the business but profits only rise 5%, that's a horrible return. That's the sort of thing we're going to discuss further into this lesson because as a new investor, the slavish devotion to constantly rising earnings per share without any attention given to return on capital is one of the most common mistakes you'll need to combat.

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This page is part of Investing Lesson 4 - How to Read an Income Statement. To go back to the beginning, see the Table of Contents.

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