What Is Net Income Applicable to Common Shares?

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.

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.

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.