Gross Profit vs. Net Income: What's the Difference?

Revenue is the amount of income generated from the sale of a company's goods and services. Gross profit helps investors to determine how much profit a company ... TableofContents Expand TableofContents Overview GrossProfit NetIncome KeyDifferences Example FAQs TheBottomLine CorporateFinance FinancialStatements GrossProfitvs.NetIncome:AnOverview Twocriticalprofitabilitymetricsforanycompanyincludegrossprofitandnetincome.Grossprofitrepresentstheincomeorprofitremainingaftertheproductioncostshavebeensubtractedfromrevenue.Revenueistheamountofincomegeneratedfromthesaleofacompany'sgoodsandservices.Grossprofithelpsinvestorstodeterminehowmuchprofitacompanyearnsfromtheproductionandsaleofitsgoodsandservices.Grossprofitissometimesreferredtoas grossincome. Ontheotherhand,netincomeistheprofitthatremainsafterallexpensesandcostshavebeensubtractedfromrevenue.Netincomeornetprofithelpsinvestorsdetermineacompany'soverallprofitability,whichreflectsonhoweffectivelyacompanyhasbeenmanaged. Understandingthedifferencesbetweengrossprofitvs.netincomecanhelpinvestorsdeterminewhetheracompanyisearningaprofit,andifnot,wherethecompanyislosingmoney. KeyTakeaways Grossprofitreferstoacompany'sprofitsaftersubtractingthecostsofproducinganddistributingitsproducts. Grossprofitdetermineshowwellacompanycanearnaprofitwhilemanagingitsproductionandlaborcosts.Netincomeindicatesacompany'sprofitafterallofitsexpenseshavebeendeductedfromrevenues.Netincomeisanall-inclusivemetricforprofitabilityandprovidesinsightintohowwellthemanagementteamrunsallaspectsofthebusiness.Netincomeisoftenreferredtosimplyasthe"bottomline." 1:05 ContrastingGrossProfitAndNetIncome GrossProfit Grossprofit,operatingprofit,andnetincomerefertotheearningsthatacompanygenerates.However,eachonerepresentsprofitatdifferentphasesoftheproductionandearningsprocess. Grossprofit isacompany's profitsearnedaftersubtracting thecostsofproducing andsellingitsproducts—calledthecostofgoodssold(COGS). Grossprofitprovidesinsightintohowefficientacompanyisatmanagingitsproductioncosts,suchaslaborandsupplies,toproduceincomefromthesaleofitsgoodsandservices. Thegrossprofit foracompanyis calculatedbysubtractingthecostofgoodssoldfortheaccountingperiodfromitstotalrevenue. Revenue Revenueisthetotalamountofmoneyearnedfromsalesfora particularperiod,suchasonequarter.Revenueissometimeslistedas netsalesbecauseitmayinclude discountsanddeductionsfrom returnedordamagedmerchandise.Forexample,companiesintheretailindustryoftenreportnetsalesastheirrevenuefigure.Themerchandisethathasbeenreturnedbytheircustomersissubtractedfromtotalrevenue.Revenueisoftenreferredtoasthe"topline"numbersinceitissituatedatthe topoftheincomestatement. CostofGoodsSold(COGS) Costofgoodssold referstothedirectcostsinvolved inproducingacompany'sgoods.COGStypicallyincludesthefollowing: Directmaterials,suchasrawmaterialsandinventoryDirectlabor,suchaswagesforproductionworkersEquipmentcostsused inproductionRepaircostsforequipmentUtilitiesforproductionfacilitiesShippingcosts WecanseefromtheCOGSitemslistedabovethatgrossprofitmainlyincludesvariablecosts—orthecoststhatfluctuatedependingonproductionoutput.Typically,grossprofitdoesn'tinclude fixedcosts,whicharethecostsincurredregardlessoftheproductionoutput.Forexample,fixedcostsmightincludesalariesforthecorporateoffice,rent,andinsurance. However,somecompaniesmightassignaportionoftheirfixedcostsusedinproductionandreportitbasedoneachunitproduced—calledabsorptioncosting.Forexample,let'ssayamanufacturingplantproduced5,000automobilesinonequarter,andthecompanypaid$15,000inrentforthebuilding.Underabsorptioncosting,$3incostswouldbeassignedtoeachautomobileproduced. HowtoCalculateGrossProfit Grossprofitiscalculatedbysubtractingthecostofgoodssoldfromacompany'srevenueornetsales,asshownbelow: Grossprofitformula. Investopedia Bothgrossprofitandnetincomearefoundontheincomestatement.Grossprofitislocatedintheupperportionbeneathrevenueandcostofgoodssold.Netincomeisfoundatthebottomoftheincomestatementsinceit'stheresultofallexpensesandcostsbeingsubtractedfromrevenue. NetIncome Netincomeissynonymouswithacompany'sprofitfortheaccountingperiod.Inotherwords,netincomeincludesallofthecostsandexpensesthatacompanyincurred,whicharesubtractedfromrevenue.Netincomeisoftenreferredtoasthe bottomlineduetoitspositioningatthebottomoftheincomestatement.  Althoughmanyitemscanbelistedonacompany'sincomestatement,dependingonthecompany'sindustry,usuallynetincomeisderivedbysubtractingthefollowingexpensesfromrevenue: Operatingexpenses Interestondebtandloans Overheadorselling,general,andadministrativeexpense(SG&A) Incometaxes Depreciation,whichistheallocationofthecostsoffixedassets,suchasequipment,overtheir usefullife orlifeexpectancy Additionalincomesourcesarealsoincludedinnetincome.Forexample,companiesofteninvesttheircashinshort-terminvestments,whichisconsideredaformofincome.Also,proceedsfromthesaleofassetsareconsideredincome. HowtoCalculateNetIncome Asstatedearlier,netincomeistheresultofsubtractingallexpensesandcostsfromrevenue,whilealsoaddingincomefromothersources.Dependingontheindustry,acompanycouldhavemultiplesourcesofincomebesidesrevenueandvarioustypesofexpenses.Someofthoseincomesourcesorcostscouldbelistedasseparatelineitemsontheincomestatement. Forexample,acompanyinthemanufacturingindustrywouldlikelyhaveCOGSlisted,whileacompanyintheserviceindustrywouldnothaveCOGSbutinstead,theircostsmightbelistedunderoperatingexpenses. Thegeneralformulafornetincomecouldbeexpressedas: NetIncome=TotalRevenue—TotalExpenses Amoredetailedformulacouldbeexpressedas: NetIncome=GrossProfit—OperatingExpenses—OtherBusinessExpenses—Taxes—InterestonDebt+OtherIncome NetIncomeExample Let'ssayacompanygenerated$1millioninrevenueandhadthefollowingcostsandotherincome: Costofgoodssoldof$600,000Operatingexpensesof$200,000Debtpaymentsof$10,000Taxpaymentsof$5,000Interestincomeof$8,000 Netincomewouldequal$193,000($1,000,000-$600,000-$200,000-$10,000-$5,000+$8,000). Investorsoftenhearthephrase:"Acompanypostedtop-lineorbottom-linegrowth."Top-linegrowthmeansagrowthinrevenuesincerevenueisthefirstortoplineoftheincomestatement.Bottomlinegrowthreferstoagrowthinnetincomesincenetincomeislistedonthebottomlineoftheincomestatement. KeyDifferences Grossprofitassessesacompany'sabilitytoearnaprofitwhilesimultaneouslymanagingitsproductionandlaborcosts.Asaresult,itisanimportantmetricindeterminingwhyacompany'sprofitsareincreasingordecreasingbylookingatsales,productioncosts,laborcosts,andproductivity.Ifacompanyreportsanincreaseinrevenue,butit'smorethanoffsetbyanincreaseinproductioncosts,suchaslabor,thegrossprofitwillbelowerforthatperiod. Forexample,ifacompanyhiredtoofewproductionworkersforitsbusyseason,itwouldleadtomoreovertimepayforitsexistingworkers.Theresultwouldbehigherlaborcostsandanerosionofgrossprofitability.However,usinggrossprofitasanoverallprofitabilitymetricwouldbeincompletesinceitdoesn'tincludealloftheothercostsinvolvedinrunningasuccessfulbusiness. Ontheotherhand,netincomerepresentstheprofitfromallaspectsofacompany'sbusinessoperations.Asaresult,netincomeismoreinclusivethangrossprofitandcanprovideinsightintothemanagementteam'seffectiveness. Forexample,acompanymightincreaseitsgrossprofitwhilesimultaneouslymishandlingitsdebtbyborrowingtoomuch.Theadditionalinterestexpenseforservicingthedebtcouldleadtoareductioninnetincomedespitethecompany'ssuccessfulsalesandproductionefforts. LimitationsofGrossProfitandNetIncome Grossprofitcanhaveitslimitationssinceitdoesnotapplytoallcompaniesandindustries.Forexample,aservicescompanywouldn'tlikelyhaveproductioncostsnorcostsofgoodssold.Althoughnetincomeisthemostcompletemeasurementofacompany'sprofit,ittoohaslimitationsandcanbemisleading.Forexample,ifacompanysoldabuilding,themoneyfromthesaleoftheassetwouldincreasenetincomeforthatperiod.Investorslookingonlyatnetincomemightmisinterpretthecompany'sprofitabilityasanincreaseinthesaleofitsgoodsandservices. OperatingProfit,GrossProfit,andNetIncome It'simportanttonotethatgrossprofitandnetincomearejusttwooftheprofitabilitymetricsavailabletodeterminehowwellacompanyisperforming.Forexample, operatingprofitisacompany'sprofitbeforeinterestandtaxesarededucted,whichiswhyit'sreferredtoasEBITorearningsbeforeinterestandtaxes. However,whencalculatingoperatingprofit,thecompany'soperatingexpensesaresubtractedfromgrossprofit.Operatingexpensesincludeoverheadcosts,suchasthesalariesfromthecorporateoffice.Likegrossprofit,operatingprofitmeasuresprofitabilitybytakingasliceorportionofacompany'sincomestatement,whilenetincomeincludesallcomponentsoftheincomestatement. Ifgrossprofitispositiveforthequarter,itdoesn'tnecessarilymeanacompanyisprofitable.Forexample,acompanycouldbesaddledwithtoomuchdebt,resultinginhighinterestexpenses,whichwipesoutthegrossprofit,leadingtoanetloss(ornegativenetincome). GrossProfitvs. NetIncomeExample RetailgiantJ.C.Penneyhasbeenoneofthemanyretailersthathaveexperiencedfinancialhardshipoverthepastseveralyears.Belowisacomparisonofthecompany'sgrossprofitandnetincomein2017,aswellasanupdatefrom2020. 2017 J.C.Penneyreportedthefollowingincomestatement for2017onits10-Kannual statement: Revenueand netsales:$12.50billionGrossprofit:$4.33billionor (totalrevenueof $12.50billion-COGSof$8.17billion)Netincome:$116millionloss Investopedia/JulieBang AlthoughJ.C.Penneyearned$4.33billioningrossprofitsthatyear,afterdeductingtheremainingexpenses,includingselling,general,andadministrative(SG&A)costs,plustheinterestcostofitsdebt,thecompanyactuallysuffereda$116millionloss.Thisreal-lifeexampledemonstrateswhyitiscriticaltoanalyzeacompany's financialstatementsusingmultiple metricstoaccuratelydeterminewhetherthecompanyisperformingwellorexperiencinglosses. 2020 J.C.Penneyhascontinuedtostruggle.InQ32020,thecompanyreported$1.758billionintotalrevenueandhad$1.178billionincostofgoodssold,whichmeansgrossprofitwas$580million. However,thecompanypostedanetlossof$368million.Althoughtherecessionfollowingthecoronavirusoutbreakin2020hurtmanyretailers,J.C.Penneyhadreportedanetlossof$93millioninthesamequarterin2019. Althoughthecompanyhasgeneratedrevenueandpositivegrossincome,J.C.Penneyshowshowcostsandinterestondebtcanwipeoutgrossprofitandleadtoanetlossoranegativefigurefornetincome. Companiescanreportapositivenetincomeandnegativegrossprofit.Forexample,acompanywithpoorsalesandrevenueperformancemightpostagrossprofitasaloss.However,ifthecompanydivestedanassetorproductline,thecashreceivedfromthesalecouldbeenoughtooffsettheloss,resultinginanetprofitforthequarter. WhatIsNetIncome? Netincomerepresentstheoverallprofitabilityofacompanyafterallexpensesandcostshavebeendeductedfromtotalrevenue.Netincomealsoincludesanyothertypesofincomethatacompanyearned,suchasinterestincomefrominvestmentsorincomereceivedfromthesaleofanasset. WhatIsGrossIncome? Grossincomeorgrossprofitrepresentstherevenueremainingafterthecostsofproductionhavebeensubtractedfromrevenue.Grossincomeprovidesinsightastohoweffectiveacompanyisatgeneratingprofitfromitsproductionprocessandsalesinitiatives. IsNetIncomeorGrossIncomeHigher? Grossincomewillalmostalwaysbeahigherfigurethannetincome,sincegrossprofithasnotaccountedforvariouscosts(e.g.,taxes)andaccountingcharges(e.g.,depreciation). HowDoICalculateNetIncomeFromGross? Netincomeisgrossprofitminusallotherexpensesandcostsaswellasanyotherincomeandrevenuesourcesthatarenotincludedingrossincome.Someofthecostssubtractedfromgrosstoarriveatnetincomeincludeinterestondebt,taxes,andoperatingexpensesoroverheadcosts. IsNetIncometheSameasProfit? Typically,netincomeissynonymouswithprofitsinceitrepresentsthefinalmeasureofprofitabilityforacompany.Netincomeisalsoreferredtoasnetprofitsinceitrepresentsthenetamountofprofitremainingafterallexpensesandcostsaresubtractedfromrevenue. TheBottomLine Grossprofitorgrossincomeisakeyprofitabilitymetricsinceitshowshowmuchprofitremainsfromrevenueafterthedeductionofproductioncosts.Grossprofithelpstoshowhowefficientacompanyisatgeneratingprofitfromtheproductionofitsgoodsandservices. Netincome,ontheotherhand,representstheincomeorprofitremainingafterallexpenseshavebeensubtractedfromrevenue,whilealsoincludinganyotherincomesources,suchasincomefromthesaleofanasset.Bothgrossincomeandnetincomeareimportantbutshowtheprofitabilityofacompanyatdifferentstages. Otherprofitabilitymetricsareused,aswell.Forexample,netprofitmarginiscalculatedbydividingnetincomebyrevenueandmultiplyingtheresultby100tocreateapercentage.Netprofitmarginshowsthepercentageofprofitthat'sbeengeneratedfromeachdollarofrevenue.Similarly,grossprofitmarginiscalculatedbydividinggrossincomebyrevenueandmultiplyingtheresultby100. Bothgrossmarginandnetprofitmarginarepopularprofitabilitymetricsusedbyinvestorsandanalystswhencomparingthelevelofprofitabilitybetweenonecompanytoanother.Thetermprofitisalsousedwhencalculatingthereturnoninvestment(ROI).ROIrepresentstheprofitearnedafterdeductingtheoriginalcostfromthemarketvalue,dividingbytheoriginalcost,andmultiplyingtheresultby100. Althoughnetincomeisconsideredthegoldstandardforprofitability,someinvestorsuseothermeasures,suchasearningsbeforeinterestandtaxes(EBIT).EBITisimportantbecauseitreflectsacompany'sprofitabilitywithoutthecostofdebtortaxes,whichwouldnormallybeincludedinnetincome. Ifaninvestorwantstoknowifacompanyisimprovingitssalesandcostcontrols,EBIThelpstostripawaysomeoftheitemsthatmanagementhaslittlecontroloverorthatdon'treflectthesalesandproductionperformanceofthecompany.Aswithanyfinancialmetric,it'sbesttouseacombinationofprofitabilitymeasurestodeterminetheextentofacompany'sprofitability. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. U.S.SecuritiesandExchangeCommission."J.C.PenneyCompany,Inc.Form10-K,February2,2019." U.S.SecuritiesandExchangeCommission."J.C.PenneyCompany,Inc.Form10-Q,October31,2020." RelatedArticles FinancialStatements OperatingIncomevs.GrossProfit Accounting GrossProfit,OperatingProfitandNetIncome FinancialRatios Howdoesgrossmarginandnetmargindiffer? FinancialStatements Revenuevs.RetainedEarnings:What'stheDifference? Tools HowDoGrossProfitandGrossMarginDiffer? Startups TheBestWaytoCalculateProfitabilityforStartups PartnerLinks RelatedTerms WhatIsOperatingIncome? Operatingincomelooksatprofitafterdeductingoperatingexpensessuchaswages,depreciation,andcostofgoodssold. more WhatIsMyGrossIncome? Grossincomerepresentsthetotalincomefromallsources,includingreturns,discounts,andallowances,beforedeductinganyexpensesortaxes. more EarningsBeforeInterestandTaxes(EBIT):DefinitionandFormula Earningsbeforeinterestandtaxes(EBIT)isanindicatorofacompany'sprofitabilityandiscalculatedasrevenueminusexpenses,excludingtaxesandinterest. more UnderstandingProfit Profitisbenefitrealizedwhentheamountofrevenuegainedfromanactivityexceedstheexpenses,costs,andtaxesneededtosustaintheactivity. more UnderstandingRevenue Revenueistheincomegeneratedfromnormalbusinessoperations.Revenuecanalsobeearnedbygovernmentsandnonprofits. more GrossMarginDefinition Thegrossmarginrepresentstheamountoftotalsalesrevenuethatthecompanyretainsafterincurringthedirectcosts(COGS)associatedwithproducingthegoodsandservicessoldbythecompany. more