Definition:

Net Income Available to Common refers to the portion of a company's earnings that is available to be distributed to common shareholders after all expenses, taxes, and preferred dividends have been paid. It represents the profit attributable to the common equity holders of the company.

Examples

If a company reports a net income of $1,000,000 and pays $200,000 in preferred dividends, the Net Income available to Common would be $800,000. This is the amount that could potentially be distributed to common shareholders or reinvested in the company.

Formula:

Net Income Available to Common = Net Income - Preferred Dividends

How to use the metric:

Investors and analysts use this metric to assess the profitability of a company from the perspective of common shareholders. It helps in evaluating the potential returns on investment for common stockholders and is often used in calculating earnings per share (EPS).

Limitations:

Net Income Available to Common does not account for potential future obligations or changes in the business environment. It also does not consider the cash flow position of the company, which might be more relevant for assessing the company's ability to pay dividends.

Applies to:

This metric is applicable across various industries, especially those with a clear distinction between preferred and common equity, such as banking, utilities, and large publicly traded corporations.

Doesn't apply to:

It is less relevant for industries or companies that do not issue preferred stock, as there would be no preferred dividends to subtract from net income. Additionally, it may not be as useful for startups or private companies where equity structures can be more complex or less standardized.

Summary:

Net Income Available to Common is a key financial metric that indicates the earnings attributable to common shareholders after preferred dividends are paid. It is widely used in financial analysis to assess the profitability and potential returns for common equity holders, although it has limitations in terms of cash flow analysis and future obligations.