What Is the Difference Between Net Income and Gross Profit?

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oi-Sunil

By Sunil Fernandes

Published: Saturday, December 12, 2015, 9:48 [IST]

There are many indicators that investors, analysts, tax authorities in any country look for. And, both gross profits and net income are the two set of financial indicators that are important from that perspective.

Net income is a commonly used term to determine the health and profitability of a company. In fact, both gross profit and net income are important parameters, in financial statements.

Gross profit is arrived by taking the sales figures, less any other manufacturing expenses, including raw material costs, labor costs. All production related costs are part of the expenses, that are taken and reduced from the revenues, to arrive at the gross profits of a company.

To arrive at the net income, you must have the gross profit with you. Thus, from the gross profit you deduct various other operational expenses, to arrive at the net income. Thus, the net income would be way lower than the gross profit. One important items that would have to be reduced from gross profits to arrive at net income would be the interest component.

You need the gross profit to arrive at the net income. If your gross profit is in the negative, your net income is likely to also show losses.

As far as individuals are concerned, the government looks at the gross income. They are not interested in your expenditures. As far as companies are concerned, tax is not paid on revenues, but on the net profits earned by a company.

The target for every company would be to increase its net income over a period of time. This is what most analysts and investors tracking the performance of a company look at.

Conclusion

For investors, the gross profit would not be very paramount. They would always look at net income of a company, which remains an important indicator for them. The net income would, however, vary when the gross profit varies.

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