Net operating income is the profit a company makes after deducting operating expenses and cost of goods sold. It’s important for measuring profitability and making future plans. It’s also used to determine income taxes and should be analyzed alongside historical and industry data.
Net operating income refers to the amount of money a company has made after cost of goods sold and operating expenses have been deducted. This is used to see if a business is making more than it spends or is operating at a loss. Net income is also referred to as “the bottom line,” because it’s usually shown at the bottom of an income statement.
This profit measurement is important because it measures a company’s profitability and how well its management is increasing that profitability. Profitability simply refers to the company’s ability to earn a profit. Expenses outside of the company’s own operations, such as investments in other businesses and start-up costs, are not included in the equation for calculating net income. This way it can serve as a true measure of a company’s long-term profitability without deducting one-time expenses.
There are several reasons to look at a company’s net operating income. Businessmen looking to invest in the company will learn management’s skill at growing its profitability simply by looking at the bottom line. If the company’s revenues exceed its operating and merchandise expenses, that speaks well for the future and longevity of the company.
The management of the company itself will want to study its net operating profit in order to plan for the future and make the necessary changes in the present. Operating expenses are dynamic and tend to go up and down over time. This is why they are also called variable expenses. Therefore, bottom line analysis can provide insight into which variable expenses are trending upwards and need adjustments for the company to continue operating profitably.
A third reason to look at the company’s net income is simply that it usually serves as a basis for determining income taxes. It is normally listed in the income statement as two different line items. One line item is net operating income before tax, which refers to earnings after deducting operating expenses but before deducting interest and taxes. The other item is net operating income after tax, which refers to earnings after deducting operating expenses, interest and taxes.
When analyzing net operating income for investment or profit increase reasons, the company’s historical data should also be considered. Only with data from previous months and years can you see whether the company’s profitability is growing or declining. Another data source against which to measure current company performance is industry data for companies of the same model. Comparing the performance of other companies in the industry can provide some insight into how the company’s profitability is growing relative to the yardstick of its peers.
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