Net profit is an economic term that determines the total amount of profit earned by a company. It highlights the gains obtained by the business over a given period.
It was considered the benchmark indicator for measuring the performance level of a company or group up until the 1980s.
Often called net income, net profit appears in the income statement and intermediate management balances. It’s also listed in a company's balance sheet under its liabilities. Different from net profit margin, which is a ratio comparing net profit to total revenue, net profit is expressed as a monetary amount.
But how is it calculated? Net profit is the sum of operating income, financial income, and exceptional income.
It then subtracts all expenses, both variable costs and fixed costs, incurred by the company from its total revenue, as well as subtracting the various taxes paid.
If the result of this operation is positive, it’s indeed net profit. On the other hand, if the calculation result is less than zero, it’s a deficit or net loss.
This differs from gross profit, which only subtracts the production costs or the cost of goods sold, on which various factors can have an impact, such as if the FIFO or LIFO method is used for valuing inventory.
Net profit can be used in different ways. It can do the following:
- compensate shareholders (with shares in the company) or partners in the form of dividends,
- be placed in reserves,
- be reinvested in the company, or
- be incorporated into capital.
