Net income: definition, formula, example
- Net income is the total amount of income remaining after deducting expenses and deductions.
- You can find a company’s net income on its income statement, which you may be able to find through the SEC’s EDGAR tool to assess the health of a business.
- Net income is also used to calculate earnings per share for investors.
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One of the most important metrics for businesses and investors to follow is Net Income (NI). This is also sometimes referred to as net profit, net profit or, more colloquially, “bottom line,” which refers to the remaining profits after deducting total expenses.
What is net income (NI)?
Net income is a key metric in assessing the health of a business and means the profit a business makes after the total of all deductions and expenses are subtracted from total income. Income includes all of the money earned by a business and is also called gross income.
Net income is a part of what you will see on a company’s income statement. It is located at the bottom of the income statement, which is why you will sometimes hear the term âincomeâ used instead of ânet incomeâ.
âNet income is the bottom line of a company’s income statement and is the amount of operating profit reported by companies after deducting the cost of goods, operating expenses and other permitted expenses,â Gabi explains. Slemer, Chartered Financial Analyst and Founder of Finasana, a financial literacy and wellness platform.
Why net income is an important metric
When you look only at revenue, you are not looking at the overall costs of running a business or how profitable it is. Similar to how you can’t just look at your individual income to gauge your personal financial well-being (net worth is a better indicator). It is essential to look at all expenses and have a clear idea of ââhow much money is coming in and what is going out.
Net income can give you an overall picture of the health of a business because it shows profit after deducting all deductions. If there are significant differences between gross income and net income, this can be a warning sign. It could mean that the expenses are too high, that the income is too low, or both.
It’s important to note that net income is only a metric to look at and can vary from business to business.
“[Net income numbers] can change drastically from company to company depending on how they choose to finance their businesses and assets. Net income also does not include capital expenditures. A given business might have quite a high net income relative to its revenue, but in reality there is a cash drain. If a company has really expensive debt, its net income could be lower than that of its counterpart which is actually less profitable but has less debt, âsays Slemer.
Investors can look at financial statements along with net income to determine the financial health of a business they are investing in.
Net income is also relevant for investors, as companies use net income to calculate their earnings per share (EPS).
“Earnings per share (EPS) is net income divided by the number of shares outstanding. If the company has issued any preferred stock, it will also subtract those preferred dividends,” said Nate Tsang, founder and CEO of WallStreetZen. âEPS should increase each year to signal that a business is profitable; the total value of BPA at any one time is less important than steady growth. “
Plus, net income isn’t just for businesses or investors. Individuals can use their net income to create a budget based on their take home pay, after deducting taxes and deductions. In some ways, this can be more realistic when you are budgeting with the money that will flow into your account.
How do you calculate net income?
Net income is usually found in a company’s income statement, also known as an income statement (P&L). As an investor, you can see this for yourself with a company’s financial records with the SEC. If you are a business owner, you can usually see this using most accounting software.
To calculate the net income yourself, you can use the following formula:
This is the simplified version of it. Your total income includes all income from sales. Your total expenses to subtract include cost of goods sold (COGS), selling, general and administrative (SG&A) expenses, as well as interest, depreciation, amortization, and any additional expenses.
Example of net income
For an example of bottom line, let’s take a look at Amazon’s income statement.
Again, the net income equation is:
Net income = Income – cost of goods sold – expenses
Consider all income which includes all sales and all income. These numbers are listed in millions.
89,296 (Revenue) = 88,912 (classified as total net revenue) + 378 (classified as total non-operating income) + 6 (classified as investing activity according to the equity method, net of tax)
Next, let’s look at the total expenses, including cost of goods sold (which is listed as âcost of salesâ and included in total operating expenses)
84,053 (Total expenses, including cost of goods sold) = 83,069 (reported as total operating expenses) + 984 (reported as provision for income taxes)
Then take 89,296 – 84,053 and you get a net income of 5,243 that you see on the bottom line in the diagram above.
Gross income vs net income
When valuing business income or individual income, there is gross income and net income.
Gross income refers to the total amount of income from all sources before everything is removed. Net income refers to income after all taxes and deductions are subtracted from gross income.
As stated earlier, gross income can be much higher than net income. Net income gives a better idea of ââhow a business is doing and is a good number to know as an individual to help you with your budget.
The financial report
Investors looking to assess a company’s performance can look at net income to determine their performance.
âNet income shines a light on how the business is run. A great product or service can generate high gross income, but if too many expenses are lost in operating expenses, the net income will suffer or maybe even will become negative. A poorly run business with a great product or service can have high gross income but very low net income, âTsang explains.
This number can change over time, but it’s important to know what a business is actually making after all expenses have been paid.