- Gross income refers to total income which includes all income and sources of income.
- Net income refers to net profit after deducting expenses.
- Investors can use these numbers to examine a company’s profitability as well as their own profits.
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When it comes to assessing income, you usually look at gross income and net income. These two numbers have important differences to consider, but can sometimes be confusing to understand. As an investor, these metrics can provide information about a company’s profitability as well as your own income.
Gross income vs net income: at a glance
Gross income and net income are two different measures that you can use to assess the profitability of a business. These numbers are also useful for assessing your own personal finances.
- Gross revenue is the total income of a business which includes all income and sources of income.
- Net income (NI) is sometimes referred to as net earnings and is total gross income less all expenses, taxes, and deductions.
Gross income is greater than net income and includes total income or income, while net income refers to net profits after deducting all expenses, taxes and deductions. For your net personal income which is generally your take home pay.
“Gross income is the total cash flow that a business generates from its sales, also known as turnover, and net income is the money that is left after a business has paid its bills and taxes.” explains James Diel, Founder and CEO of Textel.
“Both of these numbers can help investors determine how risky a business investment can be,” continues Diels. “If a business is making a lot of money but having expenses that are too high to be profitable, that’s a problem. Conversely, if a business keeps costs relatively low relative to its income, it doesn’t mean much if it does. sells much less than slow growing products. “
What is gross income?
According to the State of California Franchise Tax Board, gross business income refers to gross revenue, which includes total revenue from all sources such as sales of goods, provision of services, and any other income-generating activity less costs. of goods sold (COGS). Gross revenue refers to all income earned in a given tax year without any subtraction.
Gross income is a little different for individuals, with the IRS stating that gross income includes:
- All your salaries
- Business income
- Capital gains
- Pension distributions and all other income
You may be familiar with the term Adjusted Gross Income (AGI), which is used on your tax return.
Gross income is important for businesses and individuals to understand the total of all sources of income and sales. It can offer an overview of the income produced over the course of a year and can be used as a benchmark when planning.
What is net income?
Net income is also sometimes referred to as net profit or net profit (all of these are synonymous) and is what is left over after taking all of the total income and subtracting the total costs of running a business. To calculate net income, you take gross income and subtract taxes and expenses, and also include depreciation and amortization.
Net income is also a relevant number for investors as it is used to determine a company’s earnings per share (EPS).
How investors use these numbers
Investors can use both gross income and net income to look at the overall performance of a business. Businesses typically create financial statements that share these numbers. Gross income or income is on the top line and net income or net profit is on the bottom line.
Using the Securities and Exchange Commission (SEC) EDGAR tool, you can examine a company’s financial statements to examine gross and net income. As an example, you can view financial information on Amazon.
As stated above, gross income can show growth and viability while net income can show overall profitability after expenses. If there are consistently large discrepancies between gross income and net income, this may be a warning sign.
“Startups are considered unprofitable by most accounting standards because they reinvest all profits back into their business,” says Asher Rogovy, chief investment officer at Magnifina. Sometimes that means ‘buying income’ with marketing dollars. Ideally, that income recurs and a new marketing budget is spent to find new customers. Therefore, it makes sense to analyze gross income to measure the rate of growth of the company. ”
Rogovy also suggests looking at the net income of established companies, as the primary goal is to pay dividends to shareholders, which are determined from net income.
Investors can look at the bottom line on a company’s financial statement, which is used to calculate EPS and illustrates how much a company earns for its common shareholders. Earnings per share is the net income or net profit of a company divided by the number of common shares.
The financial report
As an investor, it is important to look at gross and net income to assess the profitability and growth of a business. It’s also a way for you to look at your personal financial situation from a new perspective and help you budget your expenses and investments with your net income or take-home pay.
Just be aware of the limits of each number. Gross income can show the likelihood of growth but not the actual cost of running a business. Net income can illustrate net profit and give you a clear idea of costs, but gives limited scope when assessing growth.
Both of these metrics can be used to assess which companies you want to invest in and can give you a nuanced look at your own personal finances.