Study Notes on Net Income, EPS, Shares Outstanding, and Dividends

Definition: Net income is the final measure of profitability on the income statement. It represents income after all expenses have been paid out.
- Also referred to as:
- Bottom line (due to its position at the bottom of the income statement)
- Net earnings
- Net profit
Example: For Apple, the reported net income is $37,000,000,000$ on sales of $170,000,000,000$ .

Definition: Shares outstanding represent the number of shares of common stock that are currently held by all shareholders. One share of common stock signifies one unit of ownership in a public company.
- For both private and public companies, shares are held by:
- Company founders
- Investors
- Management
- Employees
Shareholders' Rights: Owners of shares (shareholders) are generally entitled to:
- Vote on the selection of directors and other significant company matters in proportion to the number of shares owned.
- Receive dividends per share; thus, owning more shares results in receiving more dividends.
Treasury Shares: Shares that have been issued but later repurchased by the company are known as treasury shares or treasury stock; they are no longer considered outstanding.
Equation: Shares outstanding = Total shares issued - Treasury shares (shares repurchased by the company and retired).

Basic Shares Outstanding: Represents only the shares currently held by actual shareholders.
- Example: Information about basic shares can be found on the front cover of a company’s 10-K report.
Diluted Shares Outstanding: Includes all potentially dilutive securities that could convert into common stock at any moment, such as:
- Stock options
- Preferred shares
- Convertible preferred debt
Importance: Considering diluted shares is essential for assessing fractional ownership of the company, as these securities represent potential shareholders who could dilute ownership for current shareholders.

Definition: Earnings per share (EPS) is a key metric that measures how much of the total profits for a period belong to each shareholder. It is calculated as:
- $EPS = \frac{Net Income}{Shares Outstanding}$
Types of EPS:
- Basic EPS: Calculated by dividing net income by basic shares outstanding (actual shareholders).
- Diluted EPS: Calculated by dividing net income by diluted shares outstanding (including potential shares from options and convertible debt).
Weighted Average Shares: EPS must be presented on a weighted average share basis:
- This accounts for fluctuations in the number of shares outstanding over the period due to potential conversions or repurchases.
Example of Calculation: If Apple has a net income of $37,000,000,000$ , the calculation will consider a weighted average of shares outstanding during the period, rather than the year-end share count.
Trend: Diluted EPS is generally smaller than basic EPS because diluted shares outstanding typically exceed basic shares outstanding.

Definition: Dividends are distributions of a portion of a company's net income to shareholders, typically paid quarterly in cash.
Board of Directors: The dividend policy is determined by the board and is subject to regular review.
- Dividend decisions are discretionary; companies can decide whether to issue dividends or not.
Uses of Profits: Companies can manage profits in several ways:
- Distribute as dividends
- Reinvest in the business (e.g., new purchases, acquisitions)
- Pay down debt or liabilities
- Retain cash reserves for growth and acquisitions
Examples of Company Dividend Policies:
- Google: Has never declared or paid cash dividends and intends to retain future earnings for growth purposes.
- Apple: Paid a total of $10,500,000,000$ in dividends in 2013, forecasting quarterly dividends of $3$ per common share, subject to board approval.
- Walmart: Approved annual dividends of $1.59$ per share, which is a 9% increase compared to the previous year, with plans for quarterly payments.

Location in Financial Statements: Dividends are typically presented below net income and earnings per share on the income statement.
Example of Apple: Reported diluted EPS of $39.75$ , with dividends representing roughly 25% of net income, showing significant profit distribution to shareholders.