Net Income

Net income is the total profit remaining after subtracting all expenses from revenue: cost of goods sold, operating expenses, interest, taxes, depreciation, and any other charges. It is the last line on the income statement, which is why it is called the bottom line.

Net income divided by shares outstanding gives earnings per share, the denominator in the P/E ratio. Net income divided by revenue gives the net profit margin. Net income divided by shareholder equity gives return on equity. It is the foundation for many of the most important metrics in fundamental analysis.

Net Income vs Free Cash Flow

Net income and free cash flow can diverge significantly. Net income includes non-cash charges like depreciation and stock-based compensation. It can also be inflated by aggressive revenue recognition or one-time gains. Free cash flow measures actual cash generated, making it harder to manipulate.

When net income consistently exceeds free cash flow, it may indicate that earnings quality is poor — the company reports profits on paper but does not generate equivalent cash. When free cash flow exceeds net income, it typically signals high earnings quality, often seen in companies with significant depreciation of valuable, long-lived assets.