Key Points

● Net income is the net amount after deducting total expenses from total revenue.

● Companies can reinvest net income or repay debts.

● Net income is the most important indicator to determine a company's profitability.

Conceptual Understanding

Net income is an important indicator to measure the profit of a company or individual, generally referred to as net profit or net earnings. Simply put, net income is the amount that remains after subtracting all costs and expenses from the total income of a company or individual.

Calculation of net income:

To calculate a company's net income in business activities, first summarize all the revenue and then subtract all the expenses, including raw material costs, employee salaries, sales expenses, interest payments, taxes, etc. The remaining amount available for the company to allocate is the net income.

Companies can reinvest their net income or use it to repay debt or distribute dividends to shareholders.

The significance of net income

Because net income takes into account a company's total revenue and expenses (including taxes), it is one of the most important indicators for determining a company's profitability.

Net income helps investors understand the company's financial condition, and the relationship between revenue and costs can reflect the company's risk resistance. For example, Company A has an annual total revenue of 1 million USD and total expenses of 0.9 million USD, so the net income is 0.1 million USD; Company B has an annual total revenue of 10 million USD and total expenses of 9.8 million USD, so the net income is 0.2 million USD.

In terms of numbers, Company B has higher net income than Company A, but considering the income and expense situation, a large portion of Company B's income is consumed by costs, so Company B's profitability is weaker than Company A's.