Net Income Primer

Net Income: Scrutinized Most By Public Market, Stock Investors, and Lenders, but Important for All Organizations

Net income is one of the most relevant metrics for public companies, as it represents their GAAP profitability (which stands for Generally Accepted Accounting Principles - aka: the standards that properly put together financial standards are governed and guided by in the United States), including the impact of nearly all relevant expenses of a business.

This feeds into an Earnings Per Share (EPS) calculation, which many stocks report and get judged on by many investors - both institutional and retail investors - alike.

But beyond public companies reporting net income, it has significance and is an integral profitability metric for all other organizations.

Let’s dive in and learn more!

What is Net Income, Why is it Important, and Understanding it in Plain Terms

Net income represents a company’s earnings that remain after the impact and deducting all operating expenses, interest, taxes, and depreciation and amortization.

If you have read our prior pieces, such as the most recent article about operating income, you could also use operating income (i.e., EBIT) and deduct interest, taxes, and depreciation and amortization to arrive at net income.

All organizations, regardless if they are a public company or private company, should have a good handle of what net income it indicates the debt exposure / burden and tax exposures businesses may have beyond the operating expenses and operating costs that a company has to sustain its business.

It is also important because it is the starting point to determine cash flow, as many of you have probably seen when looking at any cash flow statement (such as the one example sourced below from Apple’s most recent 10Q filing to the SEC):

To understand it in the most layperson’s terms, net income represents the savings left over after you deduct your living expenses from your salary earnings. You use those savings to pay your taxes, student loans, and mortgage. The left over after all of that is net income.

So even you are not a public company executive or an accountant, this article should give you enough of a high-level understanding of what net income is and why it is important.

Valuate Gives You What You Need to Learn About Metrics Like Net Income in One Platform

Valuate is a helpful platform that is purpose-built to allow business owners, operators, and investors understand and compare business metrics to benchmarks and industry standards to better understand what is good for a specific financial metric and how they can improve it.

Helpful, easy-to-follow content like this article are just one pillar of Valuate’s mission, which is to help professionals connect metrics with business action plans and drive creation of value and improvements.

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