In summary, to calculate earnings available for common stockholders, we need to subtract cost of goods sold, operating expenses, and interest, tax and preferred stock dividends from sales revenue.
To calculate these earnings available, we need to understand the format of the income statement.
Income Statement Format
LESS: Cost of goods sold
= Gross profit
LESS: Operating expenses
= EBIT (earnings before interest and tax/operating profit)
= Net profit before tax
= Net profit after tax
LESS: Preferred stock dividends
= Earnings available for common stockholders
Therefore, to calculate earnings available for common stockholders, all we need to do is to subtract cost of goods sold, operating expenses, interest, tax and preferred stock dividends from the sale revenue.
Knowing the the earnings available for common stockholders is very important. Among other uses, it allows us to do the following:
1 – It allows you to calculate EPS:
Calculating EPS allows us to understand how much dollars were earned on each outstanding share of common stock.
2 – It also allows you to calculate the net profit margin ratio:
Net Profit Margin ratio = Earnings Available for Common Stockholders / Sales.
Net profit margin ratio measures how much of each sales dollar remains after all costs are deducted. In other words it measures how successful the firm is in terms of its earnings on sales.