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Net Profit

Nupur Wankhede

Discover what net profit represents to learn how a company’s earnings remain after accounting for all expenses and taxes.

Net profit refers to the income that remains after a business deducts all expenses—operating costs, interest, taxes, depreciation, and amortisation—from total revenue. It represents the residual earnings after accounting for all expenses and indicates the surplus generated during the period. Net profit is one of the widely used indicators of a company’s financial health and long-term viability.

What Is Net Profit

Net profit is the amount a business earns after removing all expenses from its total revenue. It is also known as net income, bottom line, or profit after tax.

Net Profit Meaning & Definition

  • Net Profit Meaning: The real profit left after deducting all business expenses.

  • Net Profit Definition: Net Profit = Total Revenue − Total Expenses

  • It reflects overall profitability and is reported at the bottom of the income statement.

Net profit is important because it determines whether a company is growing, sustainable, and able to reinvest, distribute dividends, or save for future expansion.

Net Profit Formula

The standard net profit formula is:

Formula

  • Net Profit = Total Revenue − (Operating Expenses + Interest + Taxes + Depreciation + Amortisation)

Example Table

Particulars Amount (₹)

Total Revenue

10,00,000

Operating Expenses

6,00,000

Interest

50,000

Taxes

80,000

Depreciation

40,000

Net Profit

2,30,000

How to Calculate Net Profit

To calculate net profit using financial statements:

Steps

  1. Find total revenue (sales + other income).

  2. Add all expenses: operating, administrative, depreciation, interest, and taxes.

  3. Use the formula: Net Profit = Revenue − Total Expenses

  4. The result is the final profit after all deductions.

This figure appears at the bottom of the profit & loss statement, hence the term bottom line.

Net Profit Example

Consider the following example:

A company earns revenue of ₹18,00,000. Its expenses include:

  • Operating expenses: ₹10,00,000

  • Interest: ₹1,00,000

  • Depreciation: ₹50,000

  • Taxes: ₹2,00,000

Calculation

Net Profit = 18,00,000 − (10,00,000 + 1,00,000 + 50,000 + 2,00,000)

Net Profit = 18,00,000 − 13,50,000 = ₹4,50,000

Net Profit vs Gross Profit

Here’s a quick view of how each of these differs:

Basis Gross Profit Net Profit

Meaning

Profit after deducting cost of goods sold (COGS).

Profit after deducting all expenses including interest & taxes.

Formula

Revenue – COGS

Revenue – All Expenses

Focus

Core business efficiency

Overall business profitability

Shown in P&L

Top section

Bottom section

Gross profit shows production or sales efficiency, while net profit reflects total financial performance.

Importance of Net Profit

Net profit is essential for evaluating a company’s financial strength. It helps:

  • Measure business profitability

  • Assess long-term sustainability

  • Evaluate ability to repay debt

  • Determine dividend distribution capacity

  • Support valuation, budgeting, and forecasting

Investors, lenders, and analysts rely heavily on net profit to understand business performance.

Net Profit Margin Ratio

The net profit margin ratio shows how much of each rupee of revenue becomes actual profit.

Formula

  • Net Profit Margin = (Net Profit ÷ Total Revenue) × 100

Example

If net profit is ₹4,50,000 and total revenue is ₹18,00,000:

Net Profit Margin = (4,50,000 ÷ 18,00,000) × 100 = 25%

The margin shows the proportion of revenue retained as net profit in the reporting period.

Net Profit vs Gross Profit (Quick Comparison)

The following comparison highlights how these differ depending on various metrics:

Metric Gross Profit Net Profit

Includes overheads

No

Yes

Includes finance costs

No

Yes

Measures

Direct production efficiency

Entire business profitability

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Disclaimer

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.

FAQs

What does net profit mean?

Net profit represents the amount a business retains after subtracting all expenses, including operating costs, interest, taxes, and depreciation, from its total revenue, showing the earnings available at the end of a financial period.

What is the formula for net profit?

The formula for net profit is calculated by taking total revenue and deducting operating expenses, interest charges, tax liabilities, depreciation, and other applicable costs to determine the final profit figure.

How to calculate net profit step by step?

Net profit is calculated by first determining the total revenue earned, then subtracting operating expenses, financing costs, taxes, depreciation, and any additional expenses, resulting in the final income available after all deductions.

What is the difference between gross profit and net profit?

The difference between gross profit and net profit is that gross profit is derived after deducting the cost of goods sold from revenue, while net profit accounts for all remaining expenses, providing a complete measure of profitability.

Why is net profit important?

Net profit is important because it reflects a business’s overall profitability, indicates its financial resilience, and helps assess whether the organisation has sufficient surplus to reinvest, manage obligations, or pursue growth initiatives.

Hi! I’m Anshika
Financial Content Specialist

Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact. 

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