- Gross income refers to total income which includes all income and all sources of income.
- Net income refers to net profit after deducting expenses.
- Investors can use these numbers to examine a company’s profitability and review its earnings.
Gross income and net income have important differences, but can sometimes be difficult to understand. As an investor, these metrics can provide insight into a company’s profitability as well as your own earnings.
What is Net Income vs. Gross Income?
Gross income and net income are two different measures that you can use to assess the profitability of a business. These figures are also useful for assessing your own personal finances.
- Gross revenue is the total revenue of a business which includes all revenue and all sources of revenue.
- Net revenue is sometimes referred to as net income and is total gross income minus all expenses, taxes and deductions.
Gross income is greater than net income and includes the total revenue or income, while net income refers to net profits after deducting all expenses, taxes and deductions. Your personal net income is generally your take home pay.
“Gross income is the total money a business makes from its sales, also known as revenue, and net income is the money left over after a business has paid its bills and taxes,” says James Diel , founder and CEO of Text.
“These two numbers can help investors determine how risky a business investment can be,” continues Diels. “If a business is making a lot of money but has expenses that are too high to be profitable, that’s a problem. Conversely, if a business is keeping costs relatively low relative to its revenue, that doesn’t mean much- thing if it significantly undersells the lagging growth products.”
What is gross income?
Gross business income refers to gross revenue, which includes total revenue from all sources such as sales of goods, rendering of services, and any other revenue-generating activity minus the cost of goods sold. Gross receipts refer to all income earned in a particular tax year without any subtractions.
Gross income is a bit different for individuals, IRS stating that gross income includes:
- All your salaries
- business income
- Capital gains
- Pension distributions and 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 all sales. It can give an overview of revenue generated in a year and can be used as a reference 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 remains after taking all of the total revenue 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 because it is used to determine a company’s earnings per share.
How investors use these numbers
Investors can use both gross income and net income to assess a company’s overall performance. Companies 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.
As shown above, gross income can show growth and sustainability, while net income can show overall profitability after expenses. If there are consistently large gaps between gross income and net income, this could 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 Magnificent. “Sometimes that means ‘buying revenue’ with marketing dollars. Ideally, that revenue is reproducing and new marketing dollars are being spent on finding new customers. Therefore, it makes sense to analyze gross revenue to measure the company’s growth rate.”
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 net income on a company’s financial statements, which is used to calculate EPS and illustrates what 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 statement
As an investor, it is important to look at gross and net income to assess a company’s profitability and growth. It’s also a way for you to look at your own personal financial situation from a new perspective and help you budget your expenses and investments with your net income or net salary.
Just be aware of the limitations of each number. Gross income can indicate 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 evaluating growth.
Both of these metrics can be used to assess the companies you want to invest with and can give you a nuanced look at your own personal finances.