What It Is:
Corporate profit, also called net income, is the amount remaining after all costs, depreciation, interest, , and other expenses have been deducted from total sales. is also referred to as the , or . The formula for is:
Note that preferred stock dividends are typically included in the traditional net income calculation, but common stock dividends are not.
How It Works/Example:
Here is some information about Company XYZ for last year:
Using the formula and the information above, we can calculate that Company XYZ's corporate profit was:
$1,000,000 - $500,000 - $300,000 - $100,000 - $5,000 + $1,000 - $10,000 - $10,000 = $76,000
This means that Company XYZ made $76,000 of corporate profit last year.
Why It Matters:
Philosophically speaking, corporate profit is what motivates industry, entrepreneurship and innovation. Adam Smith, the founder of modern , said, "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”
Corporate profit is one of the most analyzed numbers a company can produce, and it plays a part in many other financial measures. It is important to understand that is not a measure of how much a company earned during a given period. The income statement, and hence , typically includes noncash expenses, such as . It is also important to understand that changes in methods can greatly influence , and these changes may have little to do with a company's actual operations.
Changes in corporate are the subject of much analysis. In general, low could suggest myriad problems, ranging from inadequacies in customer or expense management to unfavorable accounting methods; however, some companies strive to minimize and therefore intentionally minimize net income.
Corporate varies greatly from company to company and from industry to industry. Because is measured in dollars and companies vary in size, it is often more appropriate to consider as a percentage of sales ( ) when comparing one company to another. Care should also be taken when comparing over time, as many companies and industries are cyclical and/or seasonal. This is why comparisons are generally most meaningful among companies within the same industry, and the definition of a "high" or "low" net income should be made within this context.