What it is:
How it works (Example):
Total- Total Expenses = Net Income
Net income is found on the last line of the, which is why it's often referred to as the bottom line. Let's look at a hypothetical for Company XYZ:
By using the formula we can see that:
Net Income = $100,000 - $20,000 - $30,000 - $10,000 - $10,000 = $30,000
Why it Matters:
Net income is one of the most closely followed numbers in finance, and it plays a large role in ratio analysis and financial statement analysis. Shareholders look at net income closely because it is the main source of compensation to shareholders of the company (via dividends and share buybacks), and if a company cannot generate enough to adequately compensate owners, the value of plummet. Conversely, if a company is healthy and growing, higher prices reflect the increased availability of profits.
[InvestingAnswers Feature: Financial Statement Analysis For Beginners]
Changes in net income are endlessly scrutinized. In general, when a company's net income is low or negative, a myriad of problems could be to blame, ranging from decreasing sales to poor customer experience to inadequate expense management.
Net income varies greatly from company to company and from industry to industry. Because net income is measured in dollars and companies vary in size, it is often more appropriate to consider net income as a percentage of sales, known as "profit." Another common ratio is the price-to-earnings ( ) ratio, which tells investors how much they are paying (the 's price) for each dollar of net income the company is able to generate.
If you'd like to read more in-depth information about using net income and otherline items, check out the following:
Financial Statement Analysis: The Income Statement -- Learn the most important components of the income statement and how to use them to determine a company's profitability.