Net income
Also called Net profit, Earnings, The bottom line.
What is left of revenue once every cost, including tax, has been taken off.
Net income = revenue - all costs - interest - tax
Reported as the last line of the income statementWhat it means
Net income is the accountant's answer to how much the company made. Everything is in it: the cost of the product, the cost of running the company, the cost of its debt, the tax, and any one-off gains or charges that happened to fall in the period.
That completeness is both its strength and its weakness. It is the only profit figure that leaves nothing out, and it is also the one most affected by decisions that have no cash behind them — depreciation schedules, impairments, provisions and the timing of when a sale counts.
Worked example
Revenue of $1,000m, operating income of $180m, interest of $30m and tax at 25%.
- 1Operating income less interest is 180 - 30 = $150m pre-tax.
- 2The figures on this page take net income as $150m.
- 3Divided across 25m diluted shares, that is $6.00 of earnings per share.
$150m of net income, a 15% net margin.
Every example in this glossary describes the same imaginary company, so the figures join up as you move between metrics.
How investors read it
- Compare it against operating cash flow over several years. Profit consistently above cash is worth understanding, and the explanation is sometimes ordinary and sometimes not.
- Strip out what happened once. A year containing a legal settlement or an asset sale is not the earning power of the business.
- Watch the tax rate. A profit jump driven by a one-off tax benefit does not repeat.
Where it misleads
- It is the most adjustable figure on the statements, because it sits below every judgement made above it.
- It can be negative for perfectly healthy young companies, which makes every ratio built on it meaningless rather than merely unflattering.
- It says nothing about how much capital was needed to earn it, which is what return on equity and return on invested capital are for.
How Materiality uses it
Carried as a statement line from the filings, unadjusted. It is the numerator of net margin, return on equity and return on assets, the basis of the earnings-per-share growth metric in the scorecard's Growth category, and the denominator of the payout ratio. One-off items are deliberately left in, because deciding what counts as one-off is a judgement this product does not make on your behalf.
The full methodology covers where the figures come from, how the statements are normalised, and what is deliberately left unadjusted.
Related metrics
Net margin
The share of every sales dollar that survives all the way to profit.
Earnings per share
The company's profit divided across its shares — the only profit figure an owner actually receives a slice of.
Free cash flow
Operating cash flow less capital expenditure: what the business actually generated for its owners.
Return on equity
Profit earned per dollar of shareholders' capital.
A metric on its own is a number without a business attached to it. Materialitycomputes these from a company's own SEC filings, several years of them at once, and explains what the pattern means rather than leaving you to hold fifteen definitions in your head.