Net income, often referred to as the 'bottom line', is the total earnings (or profit) a company has left after subtracting all its expenses, taxes, and costs from its total revenue. It is one of the most critical measures of a company's profitability.
While the above definition captures the essence of net income, the concept warrants a more detailed discussion. Net income is calculated by subtracting operating expenses (like rent, salaries, and utilities), interest, taxes, and other costs from a company's total revenue.
Net income can be greatly influenced by the accounting methods employed by a company. It incorporates all income and expenses, including non-operating items like gains or losses from foreign exchange, assets sales, and lawsuits.
Since net income accounts for almost all factors that may affect a company's earnings, it provides a comprehensive view of a company's profitability and financial health. However, it should not be examined in isolation, as it is the result of many operational, financial, and tax decisions.
For Walmart, net income is calculated by subtracting the costs of goods sold, store operating expenses, interest expenses, and taxes from its total revenue from product sales.
Microsoft's net income is calculated by subtracting the costs of revenue (like cost of software production), operating expenses (like research and development, sales and marketing), interest expenses, and taxes from its total revenue from product and service sales.
For Pfizer, net income is derived by subtracting the costs of goods sold, research and development costs, marketing and sales expenses, general and administrative costs, interest expenses, and taxes from its total revenue from sales of its pharmaceutical products.