Net profit is the profit a company earns after deducting all operating expenses, interest, taxes and preferred stock dividends from total revenue.
- Total revenue = All income generated from sales of products/services
- Operating expenses = Costs of production, marketing, administration etc.
- Interest expenses = Payments on debt like loans
- Taxes = Income tax payments
- Preferred stock dividends = Payment to preferred shareholders
The net profit figure reveals how much is actually left over for common shareholders. A higher net profit margin indicates greater efficiency and financial health.
For example, if a company had $10M total revenue but $7M expenses, $1M interest and $1M taxes, its net profit would be $10M – $7M – $1M – $1M = $1M.
Tracking net profit trends over time gives insights into organizational performance and success of business strategies.