Definition of Net Income

In the field of finance, the term utility is synonymous with gain or of benefit in relation to any economic activity. However, there is no single way to understand utility, as there is total, marginal, gross, and net utility. And all this must be understood within the framework of utility theory.

The calculation of net income

Economists understand utility as the quality that a product has so that a consumer can consider a desirable good, that is, the ability of a product or service to satisfy a need. On the other hand, the profit margin is understood as the percentage of profit from all the operations of a company. The mathematical formula for profit margin is as follows: profit margin = net profit / net sales. Starting from this formula, it must be indicated that the net profit is equivalent to the final return on the sale of a product. In other words, net income is the final profit or profit obtained after accounting for all business costs.

In general terms, the data on net income are evaluated periodically (every quarter or every year) and allow us to compare the

cost effectiveness business over time. This implies that the net profit is an indicator of the economic profitability of a company.

The difference between gross profit and net profit

Net profit can be confused with a similar concept, gross profit. Gross profit is understood as the difference between all income obtained by a company and the costs related to the production (Gross profit is also called gross margin or gross profit). Instead, net income is total revenue minus all costs (production costs and other costs such as depreciation, bank fees, advertising, etc.).

Other indicators of business profitability

Both net and gross profit are two indicators significant to know business profitability. However, there are other indicators that are equally relevant.

Profitability is economic performance measured in a monetary amount. However, the concept of profitability is too general and must be specified through concepts more specific, such as operating margin, net return on investment, return on heritage, ebitda, return on equity, etc. These are some of the profitability indicators, but it should not be forgotten that there are also profitability indicators productivity or debt indicators.

Photos: iStock - Drazen Lovric / Danil Melekhin

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