Net Income Percentage

Definition

The term net income percentage refers to a benchmark metric that evaluates the net income generated from all operating and financing activities. Net income percentage is oftentimes used as a performance benchmark.

Calculation

Net Income Percentage = (Net Income / Sales) x 100

Where:

  • Sales include the total revenues in the current accounting period.
  • Net income is equal to sales revenues minus all expenses, including depreciation, interest, and income taxes.

Explanation

Operating performance measures allow the investor-analyst to understand how well a company is performing with respect to sales, margins, and profits. One of the ways to measure the effectiveness of a company's core business is by calculating their net income percentage.

This metric is considered a benchmark measure and is used to compare the performance of various accounting periods. The calculation simply takes the company's net income and divides it by revenues, then multiplying by 100 to express the value as a percentage. When making period to period comparisons, it's desirable to remove extraordinary (non-recurring) revenues and expenses.

Example

Company ABC manufactures widgets and the CEO would like to start tracking the company's net income percentage. The company's income statement in the current period appears below.

Total Revenue 29,611,000
Cost of Revenue 15,693,000
Gross Profit 13,918,000
   
Operating Expenses  
Research Development 1,570,000
Selling General and Administrative 6,170,000
Total Operating Expenses 7,740,000
   
Income from Continuing Operations  
Total Other Income/Expenses Net 39,000
Earnings Before Interest And Taxes 6,217,000
Interest Expense 186,000
Income Before Tax 6,031,000
Income Tax Expense 1,674,000
Minority Interest -74,000
   
Net Income 4,283,000

A financial analyst used the above formula to determine the company's net income as:

= (4,283,000 / 29,611,000) x 100, or 14.5%

Going forward, this value will be compared to the company's performance in subsequent accounting periods.

Related Terms

operating leverage ratiocore operating earningscore growth ratecash flow from operations ratio