net profit

(noun)

The gross revenue minus all expenses.

Related Terms

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.

  • 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.

  • 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.

  • Using Financial Statements to Understand a Business

    • Normal earnings are also separated into net operational profit after taxes (NOPAT) and net financial costs.
    • In this example the balance sheet is grouped in net operating assets (NOA), net financial debt, and equity.
    • Two types of ratio analysis are analysis of risk and analysis of profitability:
    • Profitability analysis: Analyses of profitability refer to the analysis of return on capital.
    • RNOA is return on net operating assets, NFIR is the net financial interest rate, NFD is net financial debt and E is equity.

  • Operating Margin

    • If a company doesn't earn a profit, their revenues aren't helping the company grow.
    • The operating margin (also called the operating profit margin or return on sales) is a ratio that shines a light on how much money a company is actually making in profit.
    • The higher the ratio is, the more profitable the company is from its operations.
    • The operating margin is a useful tool for determining how profitable the operations of a company are, but not necessarily how profitable the company is as a whole.
    • The operating margin is found by dividing net operating income by total revenue.

  • Cash Flow Factors

    • A business's Statement of Cash Flows illustrates it's calculated net cash flow.
    • The total net cash flow is composed of several factors:
    • Over the medium term, this must be net positive if the company is to remain solvent.
    • Being profitable does not necessarily mean being liquid.
    • A company can fail because of a shortage of cash even while profitable.

  • Sales Forecast Input

    • Net sales are operating revenues earned by a company for selling its products or rendering its services.
    • Also referred to as revenue, they are reported directly on the income statement as Sales or Net sales.
    • For financial ratios that use income statement sales values, "sales" refers to net sales, not gross sales.
    • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.
    • The sales figures reported on an income statement are net sales.

  • Defining the IRR

    • IRR is a rate of return used in capital budgeting to measure and compare the profitability of investments; the higher IRR, the more desirable the project.
    • The internal rate of return (IRR) or economic rate of return (ERR) is a rate of return used in capital budgeting to measure and compare the profitability of investments.
    • The internal rate of return on an investment or project is the "annualized effective compounded return rate" or "rate of return" that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a particular investment equal to zero.
    • In more specific terms, the IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment.