{"id":28831,"date":"2024-04-15T19:29:11","date_gmt":"2024-04-16T00:29:11","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&#038;p=28831"},"modified":"2024-11-19T22:37:51","modified_gmt":"2024-11-20T03:37:51","slug":"net-income","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/","title":{"rendered":"Net Income: Definition, Interpretation, and Sample Calculations"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Net Income: Definition, Interpretation, and Sample Calculations<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/#How_to_Calculate_Net_Income\">How to Calculate Net Income<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/#Variations_of_Net_Income_Net_Income_Attributable_to_Parent_and_Net_Income_to_Common\">Variations of Net Income: Net Income Attributable to Parent and Net Income to Common<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/#Net_Income_in_Financial_Models_and_3-Statement_Projections\">Net Income in Financial Models and 3-Statement Projections<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/#Net_Income_in_Valuations\">Net Income in Valuations<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/net-income\/#Net_Income_vs_NOPAT_vs_Operating_Income_EBIT_vs_EBITDA\">Net Income vs. NOPAT vs. Operating Income (EBIT) vs. EBITDA<\/a><\/li><\/ul><\/nav><\/div>\n\n<blockquote><p><strong>Net Income Definition:<\/strong> Net Income is the \u201cbottom line\u201d on a company\u2019s Income Statement and represents its net sales minus all expenses in the period \u2013 Cost of Goods Sold, Operating Expenses, Interest, Depreciation\/Amortization, and Taxes; it does <strong>NOT<\/strong> represent cash flows during the period but rather the \u201caccounting profits.\u201d<\/p><\/blockquote>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-28832\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition.jpg\" alt=\"Net Income Definition\" width=\"1516\" height=\"130\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition.jpg 1516w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition-300x26.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition-1024x88.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition-768x66.jpg 768w\" sizes=\"(max-width: 1516px) 100vw, 1516px\" \/><\/p>\n<p>At a basic level, you can think of Net Income as \u201cRevenue \u2013 Expenses \u2013 Taxes.\u201d<\/p>\n<p>It\u2019s sort of like what <em>you as an individual<\/em> might save up each year after working, paying for your living expenses, and paying taxes to the government.<\/p>\n<p>However, there is some subtlety to this definition.<\/p>\n<p><strong>First<\/strong>, Net Income deducts \u201cnon-cash expenses\u201d and includes \u201cnon-cash revenue.\u201d<\/p>\n<p>For example, if a company sells a product to a customer and delivers this product, but the customer has not yet paid in cash, the company still records this as Revenue on the Income Statement, and it still affects the company\u2019s Taxes and Net Income.<\/p>\n<p>Also, Net Income <strong>deducts<\/strong> many non-cash expenses such as Depreciation, as they represent a company\u2019s spending on long-term assets (factories, equipment, etc.) from previous periods \u201cspread out\u201d over many years.<\/p>\n<p><strong>Second<\/strong>, Net Income does <strong>NOT<\/strong> reflect all cash inflows and outflows!<\/p>\n<p>For example, if a company issues $200 of Debt and then buys a factory for $100, neither one directly affects Net Income.<\/p>\n<p>Why?<\/p>\n<p>Because they both correspond to <strong>long-term items that will last for many years<\/strong>.<\/p>\n<p>The <strong>accrual principle of accounting<\/strong> is critical here: To appear on the Income Statement and affect Net Income, the line item must correspond to something <em>in the current period<\/em>.<\/p>\n<p>Even if this line item does <strong>not<\/strong> represent a cash inflow or outflow, it still affects Net Income because it matches the time period.<\/p>\n<h3><strong>Files &amp; Resources:<\/strong><\/h3>\n<ul>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/EBIT\/STLD-10-K.pdf\" target=\"_blank\" rel=\"noopener\">Steel Dynamics -10-K Filing (PDF)<\/a><\/li>\n<li><a href=\"https:\/\/youtube-breakingintowallstreet-com.s3.us-east-1.amazonaws.com\/Accounting\/EBIT\/STLD-Income-Statement.jpg\" target=\"_blank\" rel=\"noopener\">Steel Dynamics &#8211; Income Statement (JPG)<\/a><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Calculate_Net_Income\"><\/span><strong>How to Calculate Net Income<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>All companies list Net Income directly on their Income Statements, but if not, you can calculate it with:<\/p>\n<p><strong>Net Income<\/strong> = Revenue \u2013 Cost of Goods Sold (COGS) \u2013 Operating Expenses \u2013 Net Interest Expense +\/- Other Non-Core Items \u2013 Taxes<\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-28832\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition.jpg\" alt=\"Net Income Definition\" width=\"1516\" height=\"130\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition.jpg 1516w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition-300x26.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition-1024x88.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192540\/00-Net-Income-Definition-768x66.jpg 768w\" sizes=\"(max-width: 1516px) 100vw, 1516px\" \/><\/p>\n<p>Here\u2019s an example for Steel Dynamics:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28833 size-full\" title=\"Net Income for Steel Dynamics\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192617\/01-Net-Income-Steel-Dynamics.jpg\" alt=\"Net Income for Steel Dynamics\" width=\"1925\" height=\"1069\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192617\/01-Net-Income-Steel-Dynamics.jpg 1925w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192617\/01-Net-Income-Steel-Dynamics-300x167.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192617\/01-Net-Income-Steel-Dynamics-1024x569.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192617\/01-Net-Income-Steel-Dynamics-768x426.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192617\/01-Net-Income-Steel-Dynamics-1536x853.jpg 1536w\" sizes=\"(max-width: 1925px) 100vw, 1925px\" \/><\/p>\n<p><strong>Net Income<\/strong> = $22,260,774 in Net Sales \u2013 $16,142,943 in COGS \u2013 $545,621 in SG&amp;A \u2013 $452,551 in Profit Sharing \u2013 $27,837 in Amortization \u2013 $91,538 in Interest Expense \u2013 ($20,785) in Other Income \u2013 $1,141,577 in Income Taxes = $3,879,492 in Net Income.<\/p>\n<p>This calculation is <strong>pointless<\/strong> here because the company lists this same Net Income figure at the bottom of its Income Statement.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Variations_of_Net_Income_Net_Income_Attributable_to_Parent_and_Net_Income_to_Common\"><\/span><strong>Variations of Net Income: Net Income Attributable to Parent and Net Income to Common<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Some companies may own <strong>stakes in other companies<\/strong>, which complicates their accounting and financial statements.<\/p>\n<p>These topics are complex and not appropriate for this article, but please see our <a href=\"https:\/\/mergersandinquisitions.com\/equity-method-of-accounting\/\" target=\"_blank\" rel=\"noopener\">tutorial on the equity method of accounting<\/a> to learn more about <strong>minority stakes<\/strong> in other companies and <a href=\"https:\/\/mergersandinquisitions.com\/noncontrolling-interests\/\" target=\"_blank\" rel=\"noopener\">the one on consolidation accounting<\/a> to learn about <strong>majority stakes<\/strong>.<\/p>\n<p>The short version is that these partial ownership stakes create \u201cadditional\u201d Net Income lines, such as Net Income from Equity Investments and Net Income Attributable to Noncontrolling Interests.<\/p>\n<p><strong>Below these lines will be something like \u201cNet Income Attributable to [Company Name],\u201d which is the one you should use for analytical and valuation purposes.<\/strong><\/p>\n<p>You should use this \u201cvery bottom\u201d Net Income because you want it to reflect the company\u2019s partial ownership in other companies.<\/p>\n<p>Here\u2019s an example for Steel Dynamics:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28834 size-full\" title=\"Net Income to Noncontrolling Interests\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192719\/02-Net-Income-to-Noncontrolling-Interests.jpg\" alt=\"Net Income to Noncontrolling Interests\" width=\"1494\" height=\"1297\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192719\/02-Net-Income-to-Noncontrolling-Interests.jpg 1494w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192719\/02-Net-Income-to-Noncontrolling-Interests-300x260.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192719\/02-Net-Income-to-Noncontrolling-Interests-1024x889.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192719\/02-Net-Income-to-Noncontrolling-Interests-768x667.jpg 768w\" sizes=\"(max-width: 1494px) 100vw, 1494px\" \/><\/p>\n<p>Some companies may also have <strong>Preferred Stock<\/strong>, a Debt-like form of financing that is more expensive than Debt because it has higher \u201ccoupon rates\u201d (i.e., interest rates), and this interest, called \u201cPreferred Dividends,\u201d is <strong>not<\/strong> tax-deductible.<\/p>\n<p>When this happens, there will be a deduction for Preferred Dividends toward the bottom of the Income Statement, with a line like \u201cNet Income to Common\u201d right below it.<\/p>\n<p><strong>Again, you should always use this \u201cvery bottom\u201d Net Income in financial models and valuations.<\/strong><\/p>\n<p>Here\u2019s an example for Bank of America:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28835 size-full\" title=\"Net Income to Common\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192823\/03-Net-Income-to-Common.jpg\" alt=\"Net Income to Common\" width=\"1806\" height=\"1071\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192823\/03-Net-Income-to-Common.jpg 1806w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192823\/03-Net-Income-to-Common-300x178.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192823\/03-Net-Income-to-Common-1024x607.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192823\/03-Net-Income-to-Common-768x455.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192823\/03-Net-Income-to-Common-1536x911.jpg 1536w\" sizes=\"(max-width: 1806px) 100vw, 1806px\" \/><\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Net_Income_in_Financial_Models_and_3-Statement_Projections\"><\/span><strong>Net Income in Financial Models and 3-Statement Projections<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>In most cases, Net Income is not a <strong>driver<\/strong> in models.<\/p>\n<p>Instead, it\u2019s an intermediate number or output when you project the three financial statements or set up a cash-flow model for a company.<\/p>\n<p>In a <a href=\"https:\/\/mergersandinquisitions.com\/3-statement-model\/\" target=\"_blank\" rel=\"noopener\">3-statement model<\/a>, Net Income from the Income Statement flows into the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/cash-flow-statement\/\" target=\"_blank\" rel=\"noopener\">Cash Flow Statement<\/a> as the first line there.<\/p>\n<p>Everything else below it on the Cash Flow Statement represents an \u201cadjustment\u201d to this Net Income number, which produces the \u201cNet Change in Cash\u201d at the very bottom of the CFS.<\/p>\n<p>For example, companies often <strong>add back<\/strong> non-cash expenses, such as Depreciation and Amortization, and they also <strong>deduct<\/strong> cash outflows that did not appear on the Income Statement, such as for Capital Expenditures (the factory purchase example above).<\/p>\n<p>Here\u2019s an example from Steel Dynamics:<\/p>\n<p><img decoding=\"async\" class=\"aligncenter wp-image-28836 size-full\" title=\"Net Income Adjustments to Calculate the Net Change in Cash\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192850\/04-Net-Income-Adjustments.jpg\" alt=\"Net Income Adjustments to Calculate the Net Change in Cash\" width=\"2330\" height=\"1232\" srcset=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192850\/04-Net-Income-Adjustments.jpg 2330w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192850\/04-Net-Income-Adjustments-300x159.jpg 300w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192850\/04-Net-Income-Adjustments-1024x541.jpg 1024w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192850\/04-Net-Income-Adjustments-768x406.jpg 768w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192850\/04-Net-Income-Adjustments-1536x812.jpg 1536w, https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/15192850\/04-Net-Income-Adjustments-2048x1083.jpg 2048w\" sizes=\"(max-width: 2330px) 100vw, 2330px\" \/><\/p>\n<p>Net Income is a <strong>critical step<\/strong> when estimating the company\u2019s cash flow because it\u2019s usually the starting point.<\/p>\n<p>You make many adjustments from here, but you need to understand the company\u2019s after-tax profits before doing anything else.<\/p>\n<p>On the Balance Sheet, Net Income flows into the Retained Earnings line within Common Shareholders\u2019 Equity (or the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/statements-of-owners-equity\/\" target=\"_blank\" rel=\"noopener\">Statement of Owners\u2019 Equity<\/a>).<\/p>\n<p>The Balance Sheet stays balanced because Net Income affects Equity on the Liabilities &amp; Equity side, and the Net Change in Cash affects Cash on the Assets side.<\/p>\n<p>Meanwhile, everything in between these top and bottom lines on the Cash Flow Statement affects their corresponding line items on the Balance Sheet.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Net_Income_in_Valuations\"><\/span><strong>Net Income in Valuations<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When valuing companies, you can take a company\u2019s Equity Value (Market Cap) and divide it by its Net Income to get the Price-to-Earnings multiple, also known as the P \/ E multiple.<\/p>\n<p>For example, if a company\u2019s Equity Value is $1,000, and its Net Income is $100, its P \/ E multiple is $1,000 \/ $100 = 10x.<\/p>\n<p>By itself, this number doesn\u2019t \u201cmean\u201d anything.<\/p>\n<p>It\u2019s like visiting a house you\u2019re considering purchasing and finding that it costs $500 per square foot.<\/p>\n<p>By itself, $500 per square foot is meaningless \u2013 it means something only when you compare it to <strong>other, similar properties in the area<\/strong>.<\/p>\n<p>If everything else costs $800 per square foot, perhaps you\u2019ve found a great deal!<\/p>\n<p>Or maybe you find that this \u201ccheap house\u201d <strong>contains corpses in the basement<\/strong>, so it\u2019s not such a great deal after all.<\/p>\n<p>It\u2019s the same with P \/ E: You must compare your company to other, similar companies with similar financial profiles (\u201c<a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/comparable-company-analysis-cca\/\" target=\"_blank\" rel=\"noopener\">comparable companies<\/a>\u201d) to say anything meaningful.<\/p>\n<p>Higher P \/ E multiples mean a company is more expensive, but that needs to be taken <strong>in context<\/strong>.<\/p>\n<p>If the company is growing more quickly than its comparable companies, perhaps its higher P \/ E multiple is justified.<\/p>\n<p>Besides its use in the P \/ E multiple, Net Income is a component of the <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-equity-roe\/\" target=\"_blank\" rel=\"noopener\">Return on Equity (ROE)<\/a> and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/return-on-assets-roa\/\" target=\"_blank\" rel=\"noopener\">Return on Assets (ROA)<\/a> metrics, which are widely used in <a href=\"https:\/\/breakingintowallstreet.com\/kb\/financial-statement-analysis\/\" target=\"_blank\" rel=\"noopener\">financial statement analysis<\/a>.<\/p>\n<p>These metrics evaluate a company\u2019s \u201cefficiency\u201d in using its Total Assets or Equity to generate after-tax profits.<\/p>\n<p>If a company has higher ROA and ROE figures than other, similar companies, but it is trading at similar P \/ E multiples it could be a sign that it is undervalued.<\/p>\n<p>All these metrics \u2013 ROA, ROE, Net Income, and P \/ E \u2013 are particularly important in the <a href=\"https:\/\/mergersandinquisitions.com\/financial-institutions-group\/\" target=\"_blank\" rel=\"noopener\">financial institutions (FIG) sector<\/a> because banks and insurance firms are valued based on them.<\/p>\n<p>Since these firms earn profits in <em>direct proportion<\/em> to their Total Assets and Equity, you can evaluate their market value in relation to these metrics.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Net_Income_vs_NOPAT_vs_Operating_Income_EBIT_vs_EBITDA\"><\/span><strong>Net Income vs. NOPAT vs. Operating Income (EBIT) vs. EBITDA<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Net Income is closely related to many other metrics used in financial statement analysis and valuation, such as <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/nopat\/\" target=\"_blank\" rel=\"noopener\">Net Operating Profit After Taxes (NOPAT)<\/a>, <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebit-operating-income\/\" target=\"_blank\" rel=\"noopener\">Operating Income (EBIT)<\/a>, and <a href=\"https:\/\/breakingintowallstreet.com\/kb\/accounting\/ebitda\/\" target=\"_blank\" rel=\"noopener\">Earnings Before Interest, Taxes, Depreciation &amp; Amortization (EBITDA)<\/a>.<\/p>\n<p>To understand the differences, please see our comparison table and full tutorial on <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/ebit-vs-ebitda\/\" target=\"_blank\" rel=\"noopener\">Net Income vs. EBIT vs. EBITDA<\/a>.<\/p>\n<p>The <strong>short version<\/strong> is that EBIT and EBITDA are both pre-tax and pre-interest metrics, and EBITDA also excludes or \u201cadds back\u201d significant non-cash expenses, such as depreciation and amortization.<\/p>\n<p><strong>By contrast, Net Income deducts taxes, interest, and these major non-cash expenses.<\/strong><\/p>\n<p>Therefore, EBIT and EBITDA are often closer to a company\u2019s cash flow than Net Income\u2026 but not entirely since they exclude taxes and the interest expense.<\/p>\n<p>For more, please see <a href=\"https:\/\/breakingintowallstreet.com\/kb\/valuation\/ebit-vs-ebitda\/\" target=\"_blank\" rel=\"noopener\">the comparison article and table there<\/a>, as the differences are nuanced.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Net Income is the \u201cbottom line\u201d on a company\u2019s Income Statement and represents its net sales minus all expenses in the period \u2013 Cost of Goods Sold, Operating Expenses, Interest, Depreciation\/Amortization, and Taxes; it does NOT represent cash flows during the period but rather the \u201caccounting profits.\u201d<\/p>\n","protected":false},"featured_media":29315,"template":"","class_list":["post-28831","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-accounting"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/28831","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/29315"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=28831"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}