Introduction Net income, also known as net profit or net earnings, is a fundamental financial metric that measures the profitability of a business. It represents the amount of money a company has left after deducting all expenses, including taxes, from its total revenue. By understanding the net income formula and its applications, business owners and investors can gain valuable insights into a company's financial health and make informed decisions. In this article, we will explore the net income formula, various profit margins, and how they can be used for analysis.
Net Income Formula The net income formula is relatively simple: Net Income = Total Revenue - Total Expenses. Total revenue refers to the total amount of money generated from sales, services, or any other revenue streams. On the other hand, total expenses include all costs incurred during operations, such as salaries, utilities, rent, taxes, and interest payments.
Gross, Operating, and Net Profit Margins Profit margins are key indicators that measure a company's profitability and efficiency. They provide insights into how effectively a company is generating profits from its revenue. The three main types of profit margins are gross profit margin, operating profit margin, and net profit margin.