What stock investors need to know about net income
Net income is the actual income accrued by the business after all expenses incurred in operating the operations have been recorded.
Expenses are not just about operational costs such as labor and raw materials. It is important to note here that the economy operates on taxes paid to the government, and all businesses are expected to pay their fair share of taxes.
When these taxes, along with the amortization and interest charges on loans are all added up and subtracted from revenue, the resulting figure is net revenue.
Gross income, on the other hand, is calculated without taking into account taxes, depreciation and interest charges.
What investors need to know
Investors, especially retail investors, should not be confused. Net income and gross income indicate the performance of the business.
For example, if the gross margin is high but the business is making a net loss at this stage, there is still a scope of business that will eventually become profitable if it can eventually save on operating costs.
The net result represents the current profitability of the company. Some things, including corporate tax rates, can change in the short to medium term, and therefore, bottom line cannot be called a perfect number to rely on for long-term forecasts.
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EPS to invest in stocks
Earnings per share (EPS) can be obtained by dividing net income by the number of outstanding shares of the company. PSE is the current measure of a company’s profitability.
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Listed companies use accrual accounting in their financial statements.
This means that accrued liabilities and pending liabilities are recognized before actual cash is received or paid. The net result is affected in such a way that if the expenses incurred but not yet paid are not recognized, the net result will be higher and vice versa.
S & P / TSX Composite Index
Net income and gross income are two very different numbers, and the two can shape the performance of stocks. Now let’s take a look at the performance of the TSX Composite Index in 2021.
After starting the 2021 journey below 18,000, the index crossed 20,000 in June and ended the year at nearly 21,000. The first half, from this perspective, was better for constitutive actions. The year 2021 was overall very good with a return of over 20% for investors in this index.
At the end of the line
Net income is a number that takes into account all the inflows and outflows of money, including taxes. But companies may not fear negative net profit in the first few years of operation, so that they can capture more market share and then reduce costs with a focus on long-term profitability.