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What Is Net Income?

Views 10552022.12.09
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Key Takeaways

● Net income is the value of a company's total revenues minus total expenses.

● Companies can use their net income to reinvest or repay debts.

●Net income is an indicator of a company's profitability.

Understanding

Net income, also called net earnings, is a crucial metric for gauging a company's or individual's profitability.

Net income is the amount of a company's total revenues minus total expenses.

Calculation

The net income for a business is calculated as total revenues minus expenses of raw materials, employee salaries, selling, interest, taxes, and others.

A company can use its net income to reinvest, repay debts or pay shareholders as dividends.

What It Means

Net income takes all the revenues and expenses of a company into account, including taxes. Therefore, net income is one of the most important indicators of a company's profitability.

Net income helps investors understand a company's business performance.

The proportion of costs in revenues can reflect a company's ability to combat risks.

For example, Company A has total revenues of $1 million and expenses of $900,000 annually. Thus, its net income is $100,000.

Company B has total revenues of $10 million and costs of $9.8 million per year, and its net income is calculated as $200,000.

Although Company B's net income is higher than Company A's, Company B is less profitable than Company A because higher costs result in a large deduction from Company B's revenues.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.

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