Net income gives investors an idea of how profitable a company is. Also known as net earnings, net income is a calculation that shows how much revenue a company has over and above its costs.
When referring to individuals rather than companies, net income is the total an individual earns minus their tax liabilities and any deductions.
Generally, gross income is total revenues, while net income is gross income minus deductions.
The net income calculation is:
Gross Income – Expenses = Net Income
Or
Revenues – (cost of goods sold + expenses (admin, general, selling, operating, and other) + depreciation and amortisation + interest + taxes)
The Bottom Line
Total net income is displayed on the income statement. It often appears at the bottom of the income statement, so it is frequently referred to as ‘the bottom line.’
The calculation starts with a company’s total revenues or sales. From this total, any business and operating expenses are deducted. This results in earnings before tax. Net income is then arrived at after deducting tax.
However, investors conducting a thorough analysis of a company should closely look at the expenses deducted and other numbers used in the calculation. That’s because it’s possible to produce a favorable net income total by using inflated revenues or clever accounting methods to conceal expenses.
Net income is used to calculate a company’s earnings per share (EPS).
