What Is Net Income?
Net income is the final profit figure on the income statement, representing what is left for shareholders after a company pays all of its costs. The full walk is Revenue - COGS - Operating Expenses - Interest - Taxes = Net Income.
Because it sits at the bottom of the statement, net income is called the bottom line, the counterpart to revenue as the top line. It is the number behind headlines like a company beat or missed earnings.
How It Connects the Three Statements
Net income is the bridge between the financial statements. It is the first line of the cash flow statement, where non-cash items are added back to reach operating cash flow, and it feeds into retained earnings on the balance sheet after any dividends are paid.
This linkage is exactly what the classic interview question, walk me through the three statements, is testing. A $10 increase in depreciation, for example, reduces pre-tax income by $10 and net income by $8 at a 20% tax rate, but cash actually rises by $2 relative to the no-change case once depreciation is added back.
Example
A company earns $1,000 of revenue, pays $400 of COGS and $300 of operating expenses, leaving $300 of operating income. After $50 of interest expense, pre-tax income is $250, and at a 20% tax rate the company pays $50 of taxes, leaving net income of $200. Its net profit margin is $200 / $1,000 = 20%.
Why It Matters
Net income drives earnings per share and therefore the P/E ratio, one of the most quoted valuation multiples in markets. Growth in net income over time is a primary signal of whether a company is creating value for shareholders.
That said, net income can be shaped by one-time items, tax quirks, and accounting choices, so analysts often pair it with cash flow measures to get the full picture.
