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 ratio, core operating earnings, core growth rate, cash flow from operations ratio
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