What is Profit?
Profit is the amount of income that exceeds the amount of capital that has been issued for the production process. This is contrary to the notion of loss. Loss is a condition in which the amount of income is smaller than the amount of capital to finance production.
In addition to profit and loss, there is also a break-even point (BEP), or in layman’s language called ‘break even’, which is a condition when the amount of income is directly proportional to the costs that have been incurred as capital to produce goods or services.
What is Net Profit?
Net profit is the value of profit or excess income from trading activities in a certain period, where the value has been deducted by income tax expense.
Net income is calculated as the remainder of all revenues and gains minus all costs and losses for the period, and has also been defined as the net increase in shareholder equity resulting from the company’s operations. Net profit is different from gross profit which only deducts cost of goods sold from revenue.
Net income can be distributed among common stockholders as dividends or held by the company in addition to retained earnings. Net income is informally called the bottom line because it is usually found on the last line of a company’s income statement.
In simple terms, net profit is the money left over after paying all the expenses of a business. In practice, this can be very complex in large organizations. The bookkeeper or accountant must properly itemize and allocate income and expenses to a specific scope and work context.
Net income is usually calculated annually, for each fiscal year. Items withheld will typically include tax costs, financing costs (interest costs), and minority interest. Similarly, preferred stock dividends will be deducted as well, although they are not an expense.
Net income can also be calculated by adding the company’s operating income to non-operating income and then deducting taxes.
Net profit margin is one of the most important indicators of a company’s financial health. By tracking increases and decreases in net profit margins, companies can assess whether current practices are working and forecast profits based on revenue.
Since, companies express net profit margins as a percentage it is possible to compare the profitability of two or more businesses regardless of their size.
Investors can assess whether the company’s management generates sufficient profit from its sales and whether operating costs and overhead costs are bearable. For example, a company may earn increased revenue, but if its operating costs increase at a rate that is more than revenue, its net profit margin will shrink. Ideally, investors would want to see a track record of increasing margins, meaning net profit margins increase over time.
Most publicly traded companies report their net profit margins both quarterly during earnings releases and in their annual reports. Companies that are able to expand their net margins over time are generally rewarded with share price growth, because share price growth is usually highly correlated with earnings growth.
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