What is Net Income After Taxes (NIAT)?
Net income after taxes (NIAT) is the number of sales dollars remaining after all operating expenses, interest, depreciation, taxes and preferred stock dividends have been deducted from a firm's total revenue.
How Does Net Income After Taxes (NIAT) Work?
Net income after taxes is also referred to as the bottom line, profit or net earnings. The formula for NIAT is as follows:
Total Revenue -Total Expenses = Net Income After Taxes
Net income after taxes 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:
Income Statement for Company XYZ, Inc.
for the year ended December 31, 2008
Total Revenue $100,000
Cost of Goods Sold ($ 20,000)
Gross Profit $ 80,000
Operating Expenses
Salaries $10,000
Rent $10,000
Utilities $ 5,000
Depreciation $ 5,000
Total Operating Expenses ($ 30,000)
Interest Expense ($ 10,000)
Taxes ($ 10,000)
NIAT $ 30,000
By using the formula we can see that NIAT = $100,000 - $20,000 - $30,000, - $10,000 - $10,000 = $30,000
Why Does Net Income After Taxes (NIAT) Matter?
Net income after tax is one of the most closely followed numbers in finance, and it plays a large role in ratio analysis and financial statement analysis. Shareholders look at NIAT closely because it is the source of compensation to shareholders of the company, and if a company cannot generate enough profit to compensate owners, the value of shares will plummet. Conversely, if a company is healthy and growing, higher stock prices will reflect the increased availability of profits.
One of the most important concepts to understand is that NIAT 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. To learn about how much cash a company generates, you need to examine the cash flow statement.
Changes in NIAT are endlessly scrutinized. In general, when a company's NIAT is low or negative, a myriad of problems could be to blame, ranging from decreasing sales to poor customer experience to inadequate expense management.
NIAT varies greatly from company to company and from industry to industry. Because NIAT is measured in dollars and companies vary in size, it is often more appropriate to consider NIAT as a percentage of sales, known as 'profit margin.' Another common ratio is the price-to-earnings ratio (P/E), which tells investors how much they are paying (the stock's price) for each dollar of net profit the company is able to generate.
If you'd like to read more in-depth information about using NIAT and other income statement line items, check out the following:
Income Statement definition -- learn about this all-important financial statement used to calculate profitability.
Operating Income definition -- learn how operating income is related to net profit.
Price-to-Earnings Ratio definition -- learn how to calculate and use the P/E ratio, one of the most used ratios in investing.
