One of the best ways to evaluate a potential investment is by its profitability, which is also known as the earnings available to common stockholders. Basically, this is the company's profits after all expenses have been paid, including dividends to preferred stockholders.
Ideally, a company's available earnings will be steadily increasing over time and will be high relative to the company's share price. Here's how to find, or calculate, earnings available to common stockholders to help you assess the profitability of stocks you're interested in.
Calculating earnings available to common stockholders
For publicly traded companies, you can generally find the necessary information to calculate available earnings on a company's income statement. However, it can be helpful to know how to do the calculation the long way to understand where all the numbers on the income statement came from.
First, you need to determine a company's net profit, or net income, which is the money the company earned after paying all operating expenses, interest on its debt, income taxes, and other various costs of doing business.
Next, you need to subtract the dividends paid to preferred stockholders, if any. Many companies don't issue preferred stock (it's quite common in the financial sector), but those that do are obligated to pay their preferred dividends before common stockholders receive anything. This information is generally listed on the bottom of the income statement, right after the net income.
Once you subtract the preferred dividends from the company's net income, you'll have the net income available for common stockholders. If you want to take this a step further and calculate it on a per-share basis, simply divide this number by the total number of outstanding shares, which should be available on most major stock quotes.
To illustrate this point, let's look at Wells Fargo's (NYSE:WFC) income statement from the 2015 fiscal year. During the year, the bank brought in $90.0 billion in revenue and had a total of $67.1 billion in expenses, including general and administrative costs, interest expense, income taxes, and other expenses. When subtracting the expenses from the revenue, this translates to net income of $23.02 billion. After subtracting the roughly $1.42 billion in preferred stock dividends the company paid, the net income (earnings) available for common shareholders was $21.6 billion.
Are you ready to learn more about stocks and how to start investing? Check out The Motley Fool's Broker Center and get started today.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at email@example.com . Thanks -- and Fool on!
the_motley_fool has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.