What is net income?
Net income (also called the bottom line, net profit or net earnings) is what remains of revenue after all expenses, interest and taxes are deducted. It is the final line of the income statement under IFRS (IAS 1) and US GAAP (ASC 220) and flows into retained earnings on the balance sheet.
Formula
Net Income = Revenue − COGS − Operating Expenses − Interest − Tax
Or, working down from operating profit:
Net Income = EBIT − Interest Expense − Tax
Net income vs. related profitability measures
- Net income vs. gross profit: gross profit deducts only COGS; net income deducts everything else as well.
- Net income vs. operating profit (EBIT): EBIT excludes interest and tax; net income includes them — sensitive to capital structure and tax planning.
- Net income vs. EBITDA: EBITDA adds back depreciation and amortisation; useful for cash-flow approximation but flattering for capital-heavy businesses.
- Net income vs. cash flow: net income is accrual-based and includes non-cash items (D&A, deferred taxes); cash flow tracks the actual money movement.
Net income and the rest of the system
Net income flows in three directions: into retained earnings on the balance sheet, into the starting line of the cash flow statement (indirect method), and into earnings per share (EPS = Net Income ÷ Weighted Average Shares). It is also the input to most “P/E” type valuation ratios.
Common manipulations to watch for
- Stretching depreciable lives to reduce D&A and inflate net income.
- One-time gains reported above the line, recurring costs reported as “non-recurring”.
- Tax-rate normalisation — a low effective tax rate inflates net income unsustainably.
Do: reconcile net income to operating cash flow monthly; investigate persistent positive gaps (accruals running ahead of cash).
Don’t: chase net income at the expense of cash flow — a profitable company can still go bankrupt if its working capital absorbs all the profits.