Net profit is also called the bottom line, net income or net earnings and it is the measurement of profitability of a venture after accounting for all costs incurred during the period. Net profit is equal to the gross profit minus overheads minus interest payable for the accounting period.
A common synonym for net profit when discussing financial statements is the bottom line. This term comes from the traditional appearance of an income statement which shows the net profit on the bottom line of the report.
In short, net profit is the money left over after paying any and all the expenses of the business. In practice, it an become very complex for larger organizations and enterprises. The bookkeeper or accountant must itemize and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.
Definitions of the term can vary between countries. In the United States, net profit is often associated with net income or profit after tax.
The net profit margin percentage is a related ratio calculated by dividing net profit by revenue or turnover, and it represents the entity’s profitability as a percentage.
Why does it matter?
Net profit is one of the most closely followed numbers in finance and it plays a major role in ratio analysis and financial statement analysis. Shareholders look at the net profit closely because it is the main source of compensation to shareholders of the company. It also effects the value of shares, because higher stock prices will reflect the increased availability of profits.
One of the most important concepts to understand is that net profit is not a measure of how much money a company has earned during the financial year because the income statements contains a lot of non-cash expenses such as depreciation and amortization.
Generally, when a company’s net profit is low or negative, a variety of problems can be blamed. These can range from decreasing sales to poor customer experience to inadequate expense management.
Net income will vary greatly from company to company and from industry to industry. It is measured in dollars, pounds, euros or whatever currency you use. Companies also vary in size, this means that it is more appropriate to consider net profit as a percentage of sales, which we know as “profit margin”. Another common ratio is the price-to-earnings (P/E) ratio, which tells investors how much they are earning for each dollar (or whatever currency you use) of net income the company is able to generate.