Net Income (NI)

What Is Net Income?

Net income is the amount of money left over from a company's revenue after expenses and tax payments have been made in a period. It is a critical measure in grasping the financial strength of a business. Investors and analysts take a gander at a company's net income to determine its level of profitability. For instance, net income relative to revenue — a measurement known as net income margin or net profit margin — would demonstrate a company's ability to produce profit. Assuming expenses surpass revenue, that would be a net loss — or essentially, a loss — for the period.
For the company's executive management team, net income is useful in determining areas in which to change its funds — whether to cut back on certain expenses, for example, cost of goods sold, salaries, and interest payments, or to increase production to help revenue. It's likewise useful in understanding how to reallocate cash back to shareholders as dividends.
For publicly traded companies, net income is found in the income statement portion of the financial statement recorded quarterly and annually with the Securities and Exchange Commission. Net income is likewise called net profit, net earnings, or earnings. Just like revenue is alluded to as the top detail on the income statement (before expenses are deducted), net income is the primary concern thing (after all expenses have been deducted).
Net income is a measure under generally accepted accounting principles (GAAP). Terms that are connected with net income yet are non-GAAP incorporate adjusted net income and EBIT, and EBITDA in light of the fact that their computations don't follow accounting rules.

Step by step instructions to Calculate Net Income

The least complex method for working out net income is to deduct all expenses and tax payments from a company's revenue. Yet, there are specific things en route to deduct from revenue. The primary thing to remove is cost of goods sold, which prompts gross margin, or gross profit. Operating expenses are deducted from gross profit, and the difference is operating income. Interest costs (or costs of debt financing) and tax payments are deducted from operating income, and that difference prompts net income.

Net Income Formula

Net Income = Cost of Goods Sold - Operating Expenses - Interest Costs - Tax Payments

Net Income Example: Apple (NASDAQ: AAPL)

In the table above for Apple's annual income statements from 2017 to 2021, the top detail for revenue is marked net sales. Moving down on the income statement, things are deducted a large number of lines, forming subtotals en route, until arriving at net income.
A few investors will generally zero in on gross margin since it assists them with understanding the essential costs of production before extra expenses are deducted.
A few companies separate their net income into two types: net income attributable to the company, and net income attributable to common shareholders. Net income attributable to common shareholders is the true main concern figure in light of the fact that the earnings prohibit dividends paid to a separate class of stockholders.
Apple breaks down its net income into earnings per share, which is sorted by fundamental shares and diluted shares, and either figure is calculated by partitioning net income by the number of common shares. Essential is the number of common shares outstanding, while the diluted figure is the preferred measure since it incorporates securities that can be changed over into common shares, for example, stock options and convertible bonds.
In special cases, a company could incorporate income that isn't recurring, or is excluded as part of the periodic reporting. This would be known as a non-recurring thing, or an extraordinary (one-time) thing, and would skew the net income figure. An extraordinary thing on income or loss would be tied to the gain or loss from the sale or acquisition of an asset, for instance.

How Is Net Income Used?

Net income can be utilized to reallocate cash to stockholders as dividends or stock repurchases. Dividend investors will generally incline toward utilities stocks since they ordinarily utilize a lot of their net income to pay dividends to shareholders, for instance. A companies could likewise utilize their earnings to buy back stock in the open market to support earnings per share, on the expectation that it upgrades shareholder esteem — the less shares in the open market, the higher the earnings on a per-share basis. The stock repurchases are then changed over into treasury stock, which the company can use to issue employee stock options or exchange later.
Any money left finished and not distributed to stockholders becomes retained earnings, which are reported in the shareholders' equity statement. Net income from the period can be moved to retained earnings.

Step by step instructions to Interpret Net Income

Investors and analysts utilize net income to compare the profit of companies inside a similar industry. Profitability ratios, for example, net profit margin are well known metrics to assess a company's ability to produce profit.
As found in the table over, Apple's earnings rose significantly in 2021 from the year before as sales of its products and services became quicker than its cost of sales. Its net income nearly multiplied inside the 5-year span, from $48.4 billion of every 2017 to $94.7 billion out of 2021 as management effectively monitored operating expenses.

How Does Net Income Affect the Balance Sheet?

Net income flows into shareholders' equity as retained earnings. Retained earnings incorporates earnings from previous periods and net income from the most recent period, excluding dividends to be paid out.

What Is the Difference Between Net Income and Operating Cash Flow?

Net income fills in as a measure of financial performance, while cash flow isn't a measure of profitability. Cash flow keeps track of inflows of a company's cash per period, and furthermore assists with keeping track of its checking account. Operating cash flow is calculated by adding the cash balance to cash inflows, then taking away cash outflows.

Operating Cash Flow Formula

Cash Flow = Cash Balance + Cash Inflows - Cash Outflows

Features

• Investors ought to survey the numbers used to ascertain NI since expenses can be hidden in accounting methods, or revenues can be expanded.
• Earnings per share are calculated utilizing NI.
• NI additionally addresses a singular's total earnings or pre-tax earnings subsequent to considering deductions and taxes in gross income.
  Net income (NI) is calculated as revenues minus expenses, interest, and taxes.

FAQ

Is Negative Net Income Bad?

Negative net income, or loss, for a period means that the company is unprofitable. In any case, a few investors and analysts might contend that for recently settled companies, or startups, the degree of losses for a period or longer might be justified as money is being spent to develop its business.

Could Net Income Be Negative?

Net income can be negative assuming expenses surpass revenue, and that figure would be called net loss, or basically, loss. Net income can likewise be zero.

What Is Considered Good Net Income?

That is subjective to the perspectives on executive management, investors, and analysts. In the event that the company is profitable, it is positive on net income. A few startups have losses for quarters, or even years, before creating a gain.

Is Net Income a GAAP Term?

Net income is a term utilized under generally accepted accounting principles.

Will Net Income Be Higher Than Revenue?

Net income is lower than revenue since revenue is the top detail from which expenses are deducted. Be that as it may, in rare examples, net income can be higher than revenue if extraordinary, or one-time, things are remembered for a period.

What Is Net Income Per Share, or Earnings Per Share?

Earnings per share is calculated by partitioning net income by the number of common shares outstanding.