Formula
Net Income = Revenue − All Expenses (including taxes and interest)
The Short Version
Revenue (also called 'sales' or 'the top line') is the total money a company brings in from selling its products or services, before any costs are subtracted. Expenses are the costs of running the business. What's left after subtracting all expenses from revenue is Net Income — often called 'the bottom line' and the most commonly cited measure of a company's profit.
Explain It Like I'm 10
Imagine you run a cookie stand. You sell $100 worth of cookies (revenue). Ingredients, cups, and napkins cost you $60 (expenses). What's left in your pocket at the end, $40, is your net income — the real profit after covering everything it cost to make and sell those cookies.
Step-by-Step Example
- 1 Revenue (total cookie sales): $100.
- 2 Expenses (ingredients, supplies, etc.): $60.
- 3 Net Income = Revenue − Expenses = $100 − $60 = $40.
- 4 If next month you sell $150 of cookies (revenue UP) but expenses jump to $130 (a bigger jump), Net Income falls to only $20 — revenue grew, but profit shrank.
- 5 This is why analysts always check both numbers together, not revenue alone.
Quick Recap
- ✓ 'Top line' growth (revenue) and 'bottom line' growth (net income) don't always move together — watch both.
- ✓ Net income is the number used to calculate EPS and, from there, the P/E ratio.