Gross profit and net income are widely followed measures of a company’s prof🧜itability. They both gauge performance but in different ways by focusing on all or only a select few ex🌼penses.

Gross profit is revenue minus cost of goods sold (COGS). It's used to assess how well a company manages its production and labor costs. Net income, meanwhile, is a company’s actual profit or what it is left with after all expenses are subtracted from revenue.

Gross Profit

澳洲幸运5开奖号码历史查询:Gross profit is a compꦯany’s revenue minus the costs specifically linked to achieving those sales. It helps evaluate how well a company manages its production costs, such as labor and supplies.

It is calculated as follows:

$\begin{aligned}\textit{Gross profit}=\textit{Net sales}-COGS\end{aligned}$Gross profit=Net sales−COGS​

Components of Gross Profit

The two components of gross profit are revenue and COGS or cost of sales.

Revenue is all the money generated from a compan𝄹y’s primarꦬy business operations. For example, the revenues of a bookstore would be the money made from selling books and other items or services in the store. If the business also happened to get a payout from a lawsuit or insurance policy, those wouldn’t count as revenue.

COGS represents the 澳洲幸运5开奖号码历史查询:direct costs to pro🐲duce an item for sale. For a bookstore, that could include the costs of procuring the books sold, the shipping costs if they were bought online, and t▨he wages paid to staff serving customers in the store.

Net Income

澳洲幸运5开奖号码历史查询:Net income is the money a company has left over after paying all its expenses. It us🙈ually appears at the bottom of the income statement, earning it the name “the bottom line,” and essentially reflects a company’s profit, that is, the income it gets to keep.

It is calculated as follows:

$\begin{aligned}&\textbf{Net Income}=\text{GP}-\text{OE}-\text{OBE}-\text{T}-\text{IoD}+\text{OI}\\&\textbf{where:}\\&\text{GP}=\text{Gross profit}\\&\text{OE}=\text{Operating expenses}\\&\text{OBE}=\text{Other business expenses}\\&\text{T}=\text{Taxes}\\&\text{IoD}=\text{Interest on Debt}\\&\text{OI}|=\text{Other income}\end{aligned}$​Net Income=GP−OE−OBE−T−IoD+OIwhere:GP=Gross profitOE=Operating expensesOBE=Other business expensesT=TaxesIoD=Interest on DebtOI∣=Other income​

Components of Net Income

The components of net income are revenue, all of a company’s expenses, and additional sou♎rces of incoꦬme.

Expenses include marketing costs, salaries, rent, utilities, 澳洲幸运5开奖号码历史查询:depreciation and amortization, interest on debt and loans, and taxes. ♚Additional income, meanwhile, could represent the ꧃sale of assets or interest earned from a savings account.

Suppose a company genera♏ted $1 million in revenue and had the following costs and other in💧come:

• COGS of $600,000
• 澳洲幸运5开奖号码历史查询:Operating expenses of $200,000
• Debt payments of $10,000
• Tax payments of $5,000
• Interest income of $8,000

In this example, the company’s net income would be $193,000 ($1,000,000 - $600,000 - $200,000 - $10,000 - $5,000 + $8,000).

Key Differences Between Gross Profit and Net♔ Income

Where To Find Gross Profit and Net Income

A company’s gross profit and net income can be found on its 澳洲幸运5开奖号码历史查询:income statement.

Gross profit appears higher in the income statement under revenues and cost of sales. Subtract the latter from the former and you have t🌳he gross profit.

After gross profit, other categories of expenses are tallied up and some additional income may be added. These various f꧂igures eventually lead us to net income, which represents what is left from revenue after all of the above is subtracted and added.

Gross profit can sometimes be referred to as gross income, gross revenue, 🌳sales profit, or even gross margin. Net income, meanwhile, might be called net profit, net earnings, profit after tax, or net income available to shareholders.🌃

How Gross Profit and Net Income Are Used

Gross profit and net income are closely watched by companies🦋, investors, and other stakeholders.

Gross Profit

Gross profit gives management and investors greater clarity on how a company manages its more controllable costs. It ignores fixed expenses like administrative costs, rent, and in🍸surance and focuses on how much is spent producing the goods or services🧔 from which the company makes its money.

Being familiar with gross p🦹rofit can help companies better identify cost-cutting opportunities, set prices, and compare the efficiency of different product lines and previous processes to new ones.

For investors, gross profit is used to compare the efficiency of similar companies. With this inform♑ation, we can identify which one ha🍌s a greater handle on variable costs and is better run.

Net Income

Comಌpanies are valued and often judged not on𒀰 how much money they bring in but on how much of it they get to keep. Net income reveals this.

Unlike gross profit, net income accounts for all of a business’s costs. This means it provides a complete picture of a company’s ability to stay afloat, reinvꦍest for the future, reward shareholders with things like dividends, and so on.

Lenders use net income to assess creditworthiness. And it forms the basis of the price-to-earnings ratio, the metric many♌ stock market investors use to determine if a company’s shares are under or overvalued.

Gross Profit vs. Net Income Examples

Below are tꦬwo re💃al-world examples of gross profit and net income.

Best Buy

Here’s an image of Best Buy Co Inc.'s (BBY) income statement cov♈ering its 2024, 2023, and 2022 fiscal years.

In its 2024 fiscal year, we can see the company registered $43.45 billion in revenue, costing $33.85 billion to produce. That leaves the company, as reflected in the third line of its income statement, with a gross profit of $9.6 billion.

After gross profit, there are various smaller costs, including 澳♉洲幸运5开奖号码历史查询:selling, general, and administrative expenses, restructuring charges, income taxes, a credit from investment income, and a net gain on the sale of a subsidiary. Totaling these various outgoings and incomings leaves the company with a net income (labeled "net earnings" here) of $1.24 billion.

As you can see, net income is significantly lower than revenue and gross profit. Once all expenses were ac꧒counted for, Best Buy was left with just under 3% of the income it generated.

Apple Inc.

In the three months to Dec. 28, 2024, Apple Inc. (AAPL) reported total net sales of $124.3 billion and cost of sales of $66.03 billion. Subtract the latter from the former and you are left with a gross profit (labeled "gross margin" here) of $58.28 billion.

Other expenses, including a $248,000 loss in income, further reduced revenues, culminating in a net income of $36.3 billion, found at the bottom of the page.

Again, the most substantial expense, the cost of sales, wiped out about 53% of revenue income. Once eve⛦rythiꦦng else was accounted for, the company was left with 29% of its income.

A key takeaway is that Appl𒁏e is significantly more profitable than Best Buy.

The Bottom Line

Gross profit and net🥀 income reveal different levels of a company’s profit. Gross profit just subtracts the costs of goods sold from revenu🍸e. Net income is more inclusive, removing all expenses from revenue.

Both of these metrics are widely followed. Gross profit is good for measuring operational efficiency and a company’s management of its more controllable costs. Net income, meanwhile, looks at everything and reveals how much of a company's income is actually left, which the company can use to invest in the future and share with investors.