refers to a business’s leftover profit from subtracting total expenses and preferred dividends from total revenue.
Available Earnings Details
Available earnings are one of the best indicators to evaluate the profitability of an investment to a company. Investors and analysts use available earnings to calculate a company’s earnings per share (EPS). Companies may choose to pay out a portion of available earnings as dividends to common stockholders, depending on their business strategy. Hence, available earnings are also often known as “earnings available to common stockholders.”
For available earnings to be distributed to shareholders, a company’s financial condition needs to be favorable. If profits are insufficient or fall on par with a company’s financial obligations, there may be no earnings available to give to shareholders. Additionally, even if shareholders technically own available earnings, companies don’t have a responsibility to give out all of them. Companies who prioritize growth often keep all of their earnings, whereas businesses wishing to keep investors close to them will provide more dividend amounts to stockholders.
To calculate available earnings, first, you need to find the net income of a company. Net income is total revenue minus all expenses such as cost of goods sold (COGS), general and administrative expenses, depreciation, operating expenses, taxes, interest, and any other expense. Afterward, subtract preferred dividends from net income to get available earnings. Available earnings may be equal to net income if the company in question doesn’t have chosen stock owners.
Example of Available Earnings
Say a company reports total earnings of $15 million, total expenses of $13 million, and preferred dividends of $200,000. In this case, we can calculate the available earnings for common stockholders of the company: $15 million - $13 million - $200,000 = $1.8 million. Moreover, it’s also known that the company has total common shares held by investors (a.k.a outstanding common shares) amounting to 1 million shares. Using this information, we can calculate the earning per share (EPS) of the company.
To get EPS, divide the available earnings figure by the number of common shares held by investors: 1,800,000 / 1,000,000 = $1.8 earnings per share. Keep in mind that earnings per share don’t equal the dividend payments that shareholders will receive. EPS is simply a financial health indicator that measures how much profit investors will have if common shareholders receive all available earnings. However, in real-world scenarios, companies usually will only give out a certain percentage of their earnings as dividends, if any.
To put it simply, earnings available to common shareholders isn’t the sole determinant that decides if common shareholders will be receiving the desired share of these profits, whether in cash or check. Shareholders will need to look further if they wish to recognize the exact amount of dividend they will receive instead of simply determining if the company is in good condition or not.
Significance of Available Earnings
Available earnings are an essential indicator for investors looking to put their money on a profitable business. Usually, they don’t use available earnings as a metric but rather use it to determine EPS. EPS represents investors’ profitability. A higher value of EPS means higher potential dividend payments and increases the value of the company’s common stock.
The amount of a company’s preferred stock owners affect the value of available earnings. Preferred stock owners are those entitled to preferred shares, which give them priority when it comes to dividend payments. More preferred stock owners mean more preferred shares, which in turn lower the value of available earnings. Some companies offer both preferred stocks and common stocks, while others only stick with common stocks. To become a preferred stock owner, an investor needs to give up a certain level of voting rights or upside participation in exchanges of dividend priority.
Businesses have no obligation to use their available earnings as dividend payout and to remain competitive. Often, the decision to offer dividends is dependent on the type of the company. For instance, corporations that provide public utilities within a slow-growth segment, such as electricity, will often use available earnings to make payments to investors instead of expanding. On the other hand, sectors within high-growth segments like technology will continually reinvest excess profits.