What Is Net Income - DSers eCommerce Basics

Net Income

Net income is the amount of money an individual or corporation earns after costs, allowances, and taxes.

What Is Net Income

Net income is the amount of money an individual or corporation earns after costs, allowances, and taxes.

For the company, net income is the amount that remains after all costs, such as salaries and wages, the cost of products or raw materials, and taxes, have been paid. For individuals, net income is the amount a person keeps after paying taxes, health insurance premiums, and retirement contributions. 

Financial stability should ideally be demonstrated by net income that exceeds spending. Investors can use this figure to determine how much a company's revenue surpasses its costs. This figure measures a company's profitability and may be seen on the income statement.

How to Calculate Net Income

Net income is calculated as follows:

[Net Income] = [Revenues] - [Expenses] 

Some key points about net income:

  • Revenues

This refers to all of the money a business makes by selling products and services.

  • Expenses

This refers to all of the expenditures associated with running the company and producing those revenues. The cost of products sold and operating costs, including payroll, marketing, rent, utilities, etc. are a few important expenses.

Why Is Net Income Important

Net income is important because it reflects many things about the company’s development. Here’re some reasons that make net income become one of most important indicators that any businesses need to keep tracking:

  • It shows how profitable a company is.

Companies aim to generate profits to remain sustainable and grow over time. Net income shows how much the company earns after covering all its costs. Higher net income (all else equal) indicates better profitability.

  • It helps determine dividends.

Public companies often distribute some of their net income as dividends to shareholders. So net income plays a role in determining how much cash shareholders receive from the company.

  • It's used to calculate important ratios.

Net income is a denominator in ratios like return on equity, profit margin, and earnings per share. These ratios show investors how effectively the company utilizes its resources to generate profits.

  • It indicates the company's ability to reinvest and grow. 

Net income represents the cash left for the company to reinvest in growth initiatives like research & development, marketing, acquisitions, expanding operations, etc. The higher the net income, the more the company can invest to drive future growth.

  • It shows the value being created for shareholders

Ultimately, net income indicates the amount of economic value created by the company and potentially accruing to shareholders. This is a crucial responsibility of company management.

  • It affects the company's valuation and stock price.

All else equal, a company with a higher sustained net income will typically be valued more highly by the market and have a higher stock price.

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