net profit

Examples of net profit in the following topics:

• Profit Margin

  • Profit margin measures the amount of profit a company earns from its sales and is calculated by dividing profit (gross or net) by sales.
  • Since there are two types of profit (gross and net), there are two types of profit margin calculations.
  • Net profit is the gross profit minus all other expenses.
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
  • The percentage of net profit (gross profit minus all other expenses) earned on a company's sales.

• Cost of Goods Sold and Gross Profit

  • Gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service.
  • In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service before deducting overhead, payroll, taxation, and interest payments.
  • The various deductions leading from net sales to net income are as follows:
  • Net income (or Net profit) = Operating profit – taxes – interest
  • Explain the difference between cost of goods sold and gross profit

• Net Income

  • Net income is a distinct accounting concept from profit.
  • Profit is a term that means different things to different people, and different line items in a financial statement may carry the term "profit," such as gross profit and profit before tax.
  • In contrast, net income is a precisely defined term in accounting.
  • As profit and earnings are used synonymously for income (also depending on United Kingdom and U.S. usage), net earnings and net profit are commonly found as synonyms for net income.
  • Net sales (revenue) – Cost of goods sold = Gross profit – SG&A expenses (combined costs of operating the company) = EBITDA – Depreciation & amortization = EBIT – Interest expense (cost of borrowing money) = EBT – Tax expense = Net income (EAT)

• Return on Common Equity

  • Return on equity (ROE) measures how effective a company is at using its equity to generate income and is calculated by dividing net profit by total equity.
  • Return on equity (ROE) is a financial ratio that measures how good a company is at generating profit.
  • ROE is the ratio of net income to equity.
  • From the fundamental equation of accounting, we know that equity equals net assets minus net liabilities.
  • ROE is the product of the net margin (profit margin), asset turnover, and financial leverage.

• Profitability Ratios

  • Company A had a net income last year of ten thousand dollars.
  • In that time, its net sales were fifty thousand dollars.
  • Many analysts focus on net profit margins or returns on sales, which are calculated by taking the net income after taxes and dividing by the revenues or sales.
  • It is difficult to accurately compare the net profit ratio for different entities.
  • A low profit margin indicates a low margin of safety and a higher risk that a decline in sales will erase profits and result in a net loss or a negative margin.

• Free Cash Flow

  • Free cash flows = Net profit + Interest expense - Net Capital Expenditure (CAPEX) - Net change in Working Capital - Tax shield on Interest Expense
  • When Profit after Tax and Debit/Equity ratio (d) is available,
  • Free cash flows = Profit after Tax - Changes in Capital Expenditure x (1-d) + Depreciation & Amortization x (1-d) - Changes in Working Capital x (1-d)
  • Even profitable businesses may have negative cash flows.
  • The net income measure uses depreciation, while the free cash flow measure uses last period's net capital purchases.

• Ratio Analysis and EPS

  • Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.
  • Gross margin, Gross profit margin or Gross Profit Rate: Gross profit / Net sales
  • Profit margin, net margin or net profit margin: Net profit / Net sales
  • Return on assets (ROA ratio or Du Pont Ratio): Net income / Average total assets
  • Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS.

• Return on Total Assets

  • The return on assets ratio (ROA) is found by dividing net income by total assets.
  • It is also a measure of how much the company relies on assets to generate profit.
  • When profit margin and asset turnover are multiplied together, the denominator of profit margin and the numerator of asset turnover cancel each other out, returning us to the original ratio of net income to total assets.
  • Profit margin is net income divided by sales, measuring the percent of each dollar in sales that is profit for the company.
  • The return on assets ratio is net income divided by total assets.

• Operating Expenses, Non-Operating Expenses, and Net Income

  • Operating expenses and non operating expenses are deducted from revenue to yield net income.
  • The income statement is used to assess profitability by deducting expenses from revenue.
  • When net income is positive, it is called profit.
  • Net income increases when assets increase relative to liabilities.
  • Operating expenses, non operating expenses and net income are three key areas of the income statement.

• Gross Profit Method

  • The gross profit method uses the previous year's average gross profit margin to calculate the value of the inventory.
  • Keep in mind the gross profit method assumes that gross profit ratio remains stable during the period.
  • Calculate the cost of goods available for sale as the sum of the cost of beginning inventory and cost of net purchases.
  • Determine the gross profit ratio.
  • Gross profit ratio equals gross profit divided by sales.