<p>Net income is the total profit a company retains after subtracting all expenses, including cost of goods sold, operating costs, interest, taxes, and depreciation, from its total <a href="/NewSite/encyclopedia/revenue/" class="ency-link">revenue</a>. Often referred to as the “bottom line,” net income appears at the very end of an income statement and serves as a key indicator of a company’s profitability over a specific period. It reflects the actual earnings available to shareholders and can be used to calculate metrics such as earnings per share (EPS) and return on equity (ROE).</p>

<h2>How It Works</h2>
<p>To calculate net income, start with total revenue, then subtract the cost of goods sold (COGS) to obtain gross profit. Next, deduct operating expenses such as salaries, rent, and utilities to arrive at operating income (also called EBIT). From operating income, subtract interest expenses and any other non‑operating costs. Finally, apply the applicable tax rate to determine the tax expense, and subtract that amount to reach net income. The formula can be expressed as:</p>
<ul>
<li>Net Income = Revenue – COGS – Operating Expenses – Interest Expense – Taxes</li>
</ul>
<p>All figures used in this calculation are derived from the company’s financial statements and must adhere to generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).</p>

<h2>Why It Matters</h2>
<p>Net income provides a clear picture of a company’s ability to generate profit after covering all obligations, making it essential for investors assessing stock value and for creditors evaluating creditworthiness. A consistently growing net income signals effective management and sustainable business operations, while declining or negative net income may raise concerns about cost control or revenue generation.</p>
<p>For example, if a retail company reports $500 million in revenue, $300 million in COGS, $120 million in operating expenses, $20 million in interest, and $30 million in taxes, its net income would be $30 million. This figure helps analysts compare profitability across peers and time periods, guiding investment decisions and strategic planning.</p>