What is Net Income?
Net income (also called net profit or “the bottom line”) is the total profit a company earns after subtracting all expenses, including operating costs, interest, and taxes, from revenue. It’s the final profit available to shareholders.
Net Income Formula
$$\text{Net Income} = \text{Revenue} - \text{All Expenses}$$
Expanded:
$$\text{Net Income} = \text{Revenue} - \text{COGS} - \text{Operating Expenses} - \text{Interest} - \text{Taxes}$$
Example Calculation
| Line Item | Amount |
|---|---|
| Revenue | $100M |
| Cost of Goods Sold | -$40M |
| Operating Expenses | -$30M |
| Interest Expense | -$5M |
| Taxes | -$6M |
| Net Income | $19M |
Where Net Income Appears
Net income is found at the bottom of the income statement, which is why it’s called “the bottom line.”
Income Statement Structure
- Revenue (Top Line)
-
- Cost of Goods Sold
- = Gross Profit
-
- Operating Expenses
- = Operating Income
-
- Interest Expense
- = Pre-Tax Income
-
- Taxes
- = Net Income (Bottom Line)
Why Net Income Matters
1. Earnings Per Share
Net income is used to calculate EPS:
$$\text{EPS} = \frac{\text{Net Income}}{\text{Shares Outstanding}}$$
2. Price-to-Earnings Ratio
P/E ratio relies on earnings (net income per share).
3. Profitability Assessment
Net income shows if a company is making money for shareholders.
4. Dividend Capacity
Companies typically pay dividends from net income.
Real Company Examples
| Company | Net Income (TTM) |
|---|---|
| Apple | $124B |
| Microsoft | $88B |
| Alphabet | $94B |
| Amazon | $59B |
| Nvidia | $73B |
Net Income vs. Other Profit Metrics
| Metric | What It Excludes |
|---|---|
| Gross Profit | COGS only |
| Operating Income | COGS + OpEx |
| EBITDA | COGS + OpEx + D&A |
| Net Income | Nothing (all costs) |
Net Margin
Net margin expresses net income as a percentage of revenue:
$$\text{Net Margin} = \frac{\text{Net Income}}{\text{Revenue}} \times 100%$$
| Net Margin | Assessment |
|---|---|
| 20%+ | Excellent |
| 10-20% | Good |
| 5-10% | Average |
| Under 5% | Below average |
GAAP vs. Non-GAAP Net Income
| Type | Description |
|---|---|
| GAAP | Follows accounting standards |
| Non-GAAP/Adjusted | Excludes one-time items |
Companies often report both. Non-GAAP may exclude:
- Stock-based compensation
- Restructuring charges
- Acquisition costs
- Impairments
Net Income Quality
High Quality:
- Growing consistently
- Matches cash flow
- From core operations
Low Quality:
- One-time gains
- Accounting adjustments
- Declining trend
- Disconnected from cash flow
Limitations of Net Income
- Accounting choices: Can be managed through accounting
- Non-cash items: Includes depreciation, stock comp
- One-time items: May distort true profitability
- Timing: Recognizes revenue before cash received
Related Financial Terms
This glossary entry is for educational purposes only and does not constitute investment advice.