What is Net Income?
Net Income Formula and Example
You can calculate net income by using the following formula:
Net Income = Total - Total Expenses
Net income is found on the last line of the income statement, which is why it's often referred to as the bottom line. Let's look at a hypothetical income statement for Company XYZ:
|Company XYZ's Annual Income Statement|
To find net income using this formula, along with figures from the example table above, start with the firm's revenue, then subtract all the expenses (salaries, rent, amortization, depreciation, interest expense, and tax in this example).
By using the formula we can see that:
Net Income = $2,000,000 - ($1,000,000 + $500,000 + $25,000 + $75,000 + $50,000 + $100,000) = $250,000
So after taking the company's $2 million in revenue and subtracting the $750,000 in total expenses it had over the year, Company XYZ was left with a net income of $250,000.
Comparing Gross Income vs Net Income
While net income shows a company's income after all expenses are taken out, gross income only shows a company's revenue minus the costs of sales/costs of goods sold -- the costs that are directly tied to the product or service being sold.
For example, if a car manufacturer sells $1,000,000 worth of cars to dealerships, and it cost $200,000 to build the cars (a direct cost of sales), then the manufacturer's gross income would be $800,000.
Gross income, which is near the top of the income statement, does not include all the company's fixed operating costs that extend down the income statement like salaries, rent, amortization, deprecation, and other expenses -- all of which would be included in the company's net income.
A company's net income will virtually always be a smaller amount than its gross income.
Net Income Frequently Asked Questions (FAQs):
What does negative net income mean?
When you see a negative net income on a company's income statement it means that the company's expenses added up to more than its revenue, and thus the organization suffered a "net loss" over the period.
Changes in net income are endlessly scrutinized. In general, when a company's net income is low or negative, a myriad of problems could be to blame, ranging from decreasing sales to poor customer experience to inadequate expense management.
If a company has high net income does it have high cash flow too?
Not necessarily! It's important to know that net income is not a measure of how much cash a company earned during a given period. This is because the income statement includes a lot of non-cash expenses such as depreciation and amortization that aren't the same as cash expenses.
To learn about how much cash a company generates, you need to examine the cash flow statement (see 10 Things to Know About Every Cash Flow Statement).
What's the best way to compare net income between companies?
Net income varies greatly from company to company and from industry to industry. Because net income is measured in dollars and companies vary in size, it is often more appropriate to consider net income as a percentage of sales, known as "profit margin."
Investors like to compare company earnings using the price-to-earnings (P/E) ratio, which says how much they are paying (the stock's price) for each dollar of net income the company is able to generate.
Need more answers on net income? Check out these definitions and articles from InvestingAnswers:
8 Key Facts to Know About a Company Before You Invest -- See how net income and other key terms can tell you whether or not to invest in a company.
Financial Statement Analysis: The Income Statement -- Learn the most important components of the income statement and how to use them to determine a company's profitability.