Separation of Paid in Capital from Earned …show more content…
If most of the company’s capital is from paid-in capital, is the company profitable? This is why earned capital is much more important to investors. Paid-in capital is very important to a company when first starting out. The company will use that capital to eventually produce more earned capital. Earned capital is the actual profit the company is making from their operations. A company that makes high-earned capital is more likely to pay out dividends. For an investor dividends are very important because this is how investors make profits. To an investor, paid-in capital will turn to earned capital, which then should result in dividends and higher stock …show more content…
The basic earnings of a stock is determined by the net income minus preferred dividends divided by the weighted average number of common stock shares outstanding during a reporting period (Weygandt et al., 2013). Some companies that have a more complex capital structure dilute the earnings per share. Shares such as stock options, warrants, convertible preferred stock, and secondary equity offerings can dilute the EPS (Investopedia, 2015). These factors increase the number of outstanding shares, therefore diluting the overall EPS. For an investor, it is more important to focus on the diluted earnings per share as that will give the investor a more accurate picture as to what the share of stock is actually