The net income applicable to common shares in the income statement is probably the most interesting section for most investors. This figure defines the companies’ bottom line profit that belongs to the common shareholders. The companies usually report this figure during the period being measured.
The Function
Net income applicable to common shares is the starting point to calculate the basic and diluted earnings per shares (EPS) figure. Most of the time, the analysts usually divided this net income by the total number of outstanding shares.
Meanwhile, they get the diluted earnings per share figure from the potential dilutive transactions or events. That includes the practice of convertible debentures, employee stock options, or many more.
In the last line of this figure, you will see the net income or the total profit the company has made during a period of time.
Higher Net Income Applicable to Common Shares Doesn’t Directly Translate into a Successful Investment
Many investors get trapped in the wrong belief that a higher net income figure means that the company is doing good. But, this belief ignores the possibility of changes within the capital at work.
For instance, imagine that there is a company that only gets a 5 percent profit rise, but its board of directors pushes to issue new shares of stocks while also double the amount of money at work within the business.
This lesson is important, especially for new investors, that constantly rising earnings per share without paying sufficient attention to the return on capital is dangerous. That is because, higher earnings per share without increasing profit means the business cannot enjoy what you get.
The most tragic example of this case happened to a bank called Wachovia. It was one of the most respected financial institutions in the region. Its sudden collapse was shocking to many customers and investors.
The management of the bank wanted to increase its net income applicable to common shares without having sufficient profits increase. Thus, always pay attention to the overall net profit company.
