What is Net Income? Definition, Formula & Examples
Learn what net income means, how to calculate it, and why net income (the bottom line) matters for evaluating company profitability.
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.