This Little-Known Metric Is the Best Measure of Profitability
Shah Gilani|April 19, 2024
The world of financial analysis can seem very confusing… or even deliberately so.
You’ve got metrics like net income… earnings… and multiple profitability measures…
All are used to assess a company’s financial health and likely stock performance.
But among these metrics… one has the greatest weight. And it’s been my go-to measure of a company’s profitability for decades.
I’m talking about “net income available to common shareholders.”
The Starting Point
Net income available to common shareholders is almost always overshadowed by its broader counterparts.
But it provides a much clearer picture of a company’s profitability and value.
Net income is the bottom line or profit. It’s a fundamental metric that represents the amount of revenue that exceeds expenses. It’s calculated by subtracting all expenses, including taxes and interest, from total revenue.
Net income is a critical indicator of a company’s ability to generate “earnings” from its core operations.
And smart investors know earnings are a masterfully massaged metric.
Earnings include various measures of profitability, including gross profit, operating profit and net profit.
They offer insights into how well a company operates and how efficient it is…
But it’s impossible to know which version of earnings – and what’s in that particular bucket – is being used to calculate EPS, or earnings per share.
More Precise
Net income available to common shareholders is what I call a “refined metric.” It specifically focuses on the portion of a company’s net income attributable to common shareholders after deducting preferred dividends.
It reflects the earnings generated per share of common stock outstanding. That makes it a crucial metric for investors. By deducting dividends, the number provides a clearer picture of the earnings that can be distributed.
Here’s why that’s important…
- Shareholder Value Focus: Shareholders are the primary stakeholders in a company. They want to maximize the return on their investment. Net income available to common shareholders aligns with their interests and provides a clearer gauge of shareholder value.
- Dividend Sustainability: The amount of net income available after accounting is vital in assessing the sustainability of dividend payouts. (That’s how I came across the metric more than 20 years ago.) A higher net income available to common shareholders indicates stronger financial stability and ability to maintain or increase dividends.
- Investor Decision-Making: When deciding where to put their money, investors need to consider the potential returns. Net income available to common shareholders serves as a key input in assessing the profitability and growth prospects of a company. It helps investors make informed choices.
While net income and earnings metrics can tell you a lot about a company’s financials… net income available to common shareholders is a far more precise measure of profitability and shareholder value.
It provides a clearer picture of a company’s ability to generate returns for its investors.
All investors should use this metric to make well-informed decisions about the stocks they want to buy.
I always do.
Shah Gilani
Shah Gilani is the Chief Investment Strategist of Manward Press. Shah is a sought-after market commentator… a former hedge fund manager… and a veteran of the Chicago Board of Options Exchange. He ran the futures and options division at the largest retail bank in Britain… and called the implosion of U.S. financial markets (AND the mega bull run that followed). Now at the helm of Manward, Shah is focused tightly on one goal: To do his part to make subscribers wealthier, happier and more free.
