- Net income is the total amount of income left after expenses and deductions are taken out.
- You can find a company's net income on its income statement to assess the health of a business.
- Net income is also used to calculate earnings per share for investors.
One of the most important metrics for businesses and investors to track is net income. But what is net income exactly? Also sometimes referred to as net profit, net earnings, or — more colloquially — "the bottom line," net income refers to the profits left over after all expenses have been deducted from revenue.
Net income definition and applications
The bottom line: Profit after expenses
Net income is a key metric for assessing the health of a business. It signifies the profit a company earns, after the total of all expenses, including areas like taxes and interest payments, are subtracted from total revenue. Net income can also be calculated by subtracting all expenses and deductions from gross income, which is total revenue minus the cost of goods sold (COGS). Either approach results in the same number, assuming the same deductions are made.
Net income is one part of what you'll see on a company's income statement. It's located on the bottom line of the income statement, which is why you'll sometimes hear the term "bottom line" being used in lieu of "net income."
"Net income is the last line on a company's income statement and is the amount of operating profit businesses report after deducting cost of goods, operating expenses, and other allowable expenses," says Gabi Slemer, CFA and founder of Finasana, a financial literacy and wellness platform.
Applies to businesses and individuals
While net income is often used as a financial metric for businesses to show profitability, it can apply to individuals too. Typically, individuals use net income in the context of how much money they earn after taxes and deductions. For an employee, net income — also called net pay — is simply how much they end up with from each paycheck, as opposed to their gross pay.
Note that gross pay/gross income for individuals differs from how it's used for businesses, where gross income deducts COGS.
So, for individuals, your salary might mean getting paid $4,000 every two weeks, but after taxes and deductions, perhaps $2,500 hits your bank account.
How to calculate net income
The basic formula
Net income is typically found on a company's income statement, which is also called a Profit and Loss statement (P&L). As an investor, you can see this for yourself through a public company's financial filings with the Securities and Exchange Commission (SEC). If you're a business owner, you can typically see this using most accounting software.
Knowing how to calculate net income using basic financial metrics can prove quite helpful.
Here is a net income formula you can use yourself:
That's the simplified version. Your total revenue includes all income from sales and any other sources like investment income. Your total expenses to be subtracted include cost of goods sold and all other expenses like for payroll, marketing, as well as interest, depreciation, amortization, and any other additional expenses.
For an example of net income, let's take a look at a past 10-Q filing by Amazon, under Consolidated Statements of Operations:
Again, the equation for net income is:
Net income = Revenue - cost of goods sold - expenses
Let's take all revenue which includes all sales and income. These numbers are listed as millions. Note that Amazon lists net sales, which typically reflects deductions like for returns, rather than reporting those as revenue and breaking them out separately.
So, you'd start with $89,296 as Revenue, which is derived from the $88,912 listed as total net sales + $378 (listed as total non-operating income) + $6 (listed as equity method investment activity, net of tax).
Then let's look at total expenses, including cost of goods sold (which is listed as "cost of sales" and included in total operating expenses). This gives you the following:
$84,053 (Total expenses, including the cost of goods sold) = $83,069 (listed as total operating expenses) + $984 (listed as provision for income taxes)
Then take $89,296 - $84,053 and you get a net income of $5,243 which you see on the bottom line in the diagram above.
Net income vs. gross income
When evaluating either business income or individual income, there is gross income and net income, which typically differs for businesses vs. individuals.
For business, gross income refers to the total amount of income earned from all sources after deducting the cost of goods sold but before anything else is taken out. Although this doesn't fully reveal your profit, it can be a useful indicator to see how your production costs compare to sales. For example, if you have $1 million in revenue but only $10,000 in gross income because you're barely selling products for more than they cost to produce, then it probably doesn't make sense to carry on in the same way. Other expenses like for marketing can be tweaked, but that's not the issue here. Nor is it likely a matter of low sales. Instead, this gross income tells you that you probably either need to lower production costs or increase prices.
For individuals, gross income is usually your gross pay, i.e., your overall salary and other earnings, since there's generally no COGS to deduct.
For both businesses and individuals, net income refers to income after all expenses, taxes and other deductions are subtracted from the gross income.
As such, gross income might be much higher than net income. Net income gives an even better picture of how a business is doing and is a good number to know as an individual to help with your budget. For example, a business with high gross income might still have negative net income if it's paying high costs for things like office space, computers, administrative staff, etc. And for individuals, your net income should be what you base spending decisions on, since that's the money you actually can use, rather than going off your gross pay.
Why net income matters
Indicator of profitability
Net income is a good indicator of how profitable a company is or is not. When you look only at revenue, you're not looking at the big picture costs of running a business or its profitability.
This is similar to how you can't just look at your individual income to assess your personal financial wellbeing (looking at net worth is often a better indicator). It's key to look at all expenses and get a clear idea of what money is coming in and what is going out.
Net income can give you an overall idea of the health of a business, particularly because it shows profits after all deductions are taken out. If there are major differences between gross and net income, it can be a warning sign. It could mean that expenses are too high, income is too low, or both.
That said, it's important to note that net income is just one metric to look at and it can vary from business to business. Sometimes it still doesn't tell the full story of financial health, which is why it's important to look at multiple financial metrics and statements together.
"[Net income numbers] can change drastically from one business to another based on how they choose to fund their companies and assets," explains Slemer. "Net income also doesn't include capital expenditures. A given business could have a pretty high net income relative to their earnings but in reality be hemorrhaging cash."
Informs business decisions
Executives and managers running companies can use net income as a yardstick of success, and once they know this number, they can use it to strategize. If a company is generating substantial net income, its current operations may have little reason to change. Perhaps there's room to invest more in areas like hiring to drive sales even further.
However, if a business is generating very modest profits, or operating at a loss, it may be a great time to make some changes, like raising prices or finding a lower-cost supplier.
Your company's current net income can also give you a better sense of how easily you can access credit. Taking out a loan is generally easier if you can show that you're profitable and have the means to pay back what you've borrowed.
Attracts investors
Prospective investors will often take interest in companies that have a history of generating a strong net income — especially value investors in many cases, whereas growth investors might be more patient with companies that are not yet generating positive net profit.
Net income is also relevant to current investors, as businesses use net income to calculate their earnings per share, which provides a quick benchmark to compare companies.
"Earnings per share is the net profit divided by the number of outstanding shares. If the company has issued any preferred stock, they'll subtract those preferred dividends as well," says Nate Tsang, founder of WallStreetZen. "EPS should increase yearly to signal that a company is profitable; the total value of EPS at any given time is less important than regular growth."
Personal use
Additionally, net income isn't just for businesses or investors to use. Individuals can use net income to create a budget based on their take-home pay, after taxes and deductions are taken out.
FAQs about net income
Is net income the same as cash flow?
No, net income and cash flow are not the same thing. The former includes non-cash items like depreciation, while cash flow measures the actual movement of cash in and out of a business over a given period. A company might have positive net income but have poor cash flow, such as if customers take a while to pay.
What's the difference between gross income and net income?
For businesses, gross income equals revenue minus the cost of goods sold (COGS), whereas net income is the profit you have after subtracting all other deductions and expenses, including COGS. For individuals, gross income is your total earnings while net income is earnings after taxes and other deductions are taken out of your paycheck.
Can net income be negative?
Yes, a company's net income can be negative, which means that the business is operating at a loss. An individual generally wouldn't have a negative net income, though, unless there was a rare instance like incurring health insurance deductions while not earning anything that pay period.
How do I find a company's net income?
Publicly traded companies report their net income on their income statements, which are found on their 10-Q and 10-K. Search the SEC's EDGAR database for these statements.
How can I improve my personal net income?
You can improve your personal net income by increasing gross income, such as by getting a raise, or by reducing taxes and deductions, such as by moving to a lower-tax state or reducing contributions to a retirement plan. Those reductions are not necessarily in your best interest though, so it might be more useful to focus on increasing your gross income or improving how you spend your net income.
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