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.
