What is net income for dummies?

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 their income statement to assess the health of a bu

What is net income for dummies?
  • 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 their income statement to assess the health of a business.
  • Net income is also used to calculate earnings per share for investors.Get the latest tips you need to manage your money  delivered to you biweekly.LoadingSomething is loading.Email address By clicking Sign up, you agree to receive marketing emails from Insider as well as other partner offers and accept our Terms of Service and Privacy Policy.

One of the most important metrics for businesses and investors to track is net income. This is also sometimes referred to as net profit, net earnings, or  more colloquially  'the bottom line,' which refers to the profits left over after total expenses have been deducted.

What is net income?

Net income is a key metric for assessing the health of a business and signifies the profit a company earns after the total of all deductions and expenses are subtracted from total revenue. Revenue includes all money earned by a company, and is also referred to as gross income.

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, a Chartered Financial Analyst and founder of Finasana, a financial literacy and wellness platform.

Why net income is an important metric

When you look only at revenue, you're not looking at the big picture costs of running a business or its profitability. Similar to how you can't just look at your individual income to assess your personal financial wellbeing (looking at net worth is 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, 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.

It's important to note that net income is just one metric to look at and it can vary from business to business.

"[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."

Investors can review financial statements with net income to determine the financial health of a company they're investing with.

Net income is also relevant to investors, as businesses use net income to calculate their earnings per share.

"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 and CEO at 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."

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.

Quick tip: You can review financial information for a company using the Securities and Exchange Commission's (SEC) EDGAR tool.

How to calculate net income

Net income is typically found on a company's income statement, which is also called a Profit and Loss statement. As an investor, you can see this for yourself through a company's financial filings with the SEC. If you're a business owner, you can typically see this using most accounting softwares.

To calculate net income yourself, you can use the following formula:

You might need to do some additional calculations to find the total sales revenue and total expenses.Rachel Mendelson/Insider

That's the simplified version. Your total income includes all sales revenue. Your total expenses to be subtracted include cost of goods sold, selling, general, and administrative expense, as well as interest, depreciation, amortization, and any other additional expenses.

Example of net income

For an example of net income, let's take a look at Amazon's statement of operations.

Amazon's statement of operations is publicly available through their filings with the SEC.SEC EDGAR

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.

89,296 (Revenue) = 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)

84,053 (Total expenses, including 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.

Gross income vs. net income

When evaluating either business income or individual income, there is gross income and net income.

Gross income refers to the total amount of income earned from all sources before anything is taken out. Net income refers to income after all taxes and deductions are subtracted from the gross income.

As noted earlier, gross income might be much higher than net income. Net income gives a better picture into how a business is doing and is a good number to know as an individual to help with your budget.

Quick tip: Calculate your individual gross income and net income to see the difference. Your net income may be much lower after taxes and deductions.

The financial takeaway

Investors looking to evaluate a company's performance can look at net income to determine how well they're doing.

"Net income sheds light on how well the business is run," Tsang says. "A great product or service can bring in a high gross income, but if too much is being lost to operating expenses, then the net income will suffer or perhaps even turn negative. A poorly run business with a great product or service may have a high gross but a very poor net."

That number might shift over time, but it's important to be aware of what a company is bringing in after expenses.MelanieLockertMelanieLockertis the founder of the blog and author of the book, "Dear Debt." Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Business Insider, Time, Huffington Post and more. She is also the co-founder of theLola Retreat, which helps bold women face their fears, own their dreams and figure out a plan to be in control of their finances.Read more Read less

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