Net Income
The profit remaining after all expenses, interest, and taxes are deducted from revenue. The bottom line of the income statement.
Net Income is the bottom-line profit remaining after all costs, expenses, interest, and taxes are deducted from revenue. It represents how much profit the company actually makes.
Formula
Net Income = Revenue - Cost of Goods Sold - Operating Expenses - Interest - Taxes
This is the final profit number reported on the income statement, attributable to shareholders.
Example
Apple (AAPL) reports revenue of $400 billion. After deducting $220 billion for cost of goods, $80 billion for operating expenses, $5 billion for interest, and $35 billion for taxes, net income is $60 billion. This is the profit available to reinvest, pay dividends, or add to reserves.
How to Interpret It
- Positive net income: The company is profitable and shareholders benefit.
- Negative net income (loss): The company lost money; shareholders' equity erodes unless the company can turn around.
- Growing net income: Profit is expanding, typically driving stock prices higher if expectations weren't already priced in.
- Margin improvement: If net income grows faster than revenue, margins are expanding (becoming more profitable per dollar of sales).
- Quality of earnings: Two companies with the same net income can differ; one might be from core operations, the other from asset sales or accounting adjustments.
Limitations
- Net income is an accounting measure, not cash. A profitable company can run out of cash if it doesn't convert profits to cash quickly.
- One-time items (restructuring charges, asset writedowns, litigation settlements) distort net income in any single year; use averages.
- Different depreciation methods and accounting choices can affect net income even if the underlying business is identical.
- Net income doesn't account for capex needed to maintain the business; compare to free cash flow for a better picture.
Related Terms
- Revenue — the starting point before expenses
- Operating Income — profit from core operations before interest and taxes
- Earnings Per Share — net income divided by share count
- Net Profit Margin — net income as a percentage of revenue