Definition
Net income is what a company has left in its pocket for good after subtracting every cost and tax from all the revenue it earned over a set period (usually one year). Here, "current period" means this accounting period, and "net" means the profit that remains after every bit of extra cost is stripped away.
Following the Money at a Bungeoppang Stand
Say you sell 10 million won worth of bungeoppang (Korea's fish-shaped pastries filled with sweet red bean) in a month. You can't take all 10 million won home. First, you subtract the cost of ingredients like flour and red bean paste. That gets back what it cost to make the pastries.
Next, you subtract the running costs of the stand: the rent for your spot, gas, and the cost of printing flyers. What's left after that is operating profit, the real gain from your main business.
But you're not done yet. You still have to pay interest on the bank loan you took out to set up the stand, and you have to pay taxes. After taking out all of these costs, the pure money you finally hold in your hand is net income.
How Is It Different from Operating Profit?
Many people mix up operating profit and net income. Operating profit is a report card for how well a company did at its "main business." For a smartphone maker, it's the pure result of building and selling phones.
Net income, on the other hand, also reflects every surprise that happens outside the main business. No matter how well the phones sell, if shares the company owned crash and cause a big loss, or a factory fire forces it to pay out a lot of money, net income can turn negative.
The reverse can happen too. A company can lose money on its main business, but if it sells valuable land or a building it owned and makes a big one-time gain, net income shows a profit. That's why smart investors always compare it with operating profit, the main-business score, so they aren't fooled by a flash of net income that won't last. One note: under Korea's new accounting standard (K-IFRS No. 1118), which applies from 2027, profit from selling land or buildings is included in operating profit.
To Be a Bit More Precise: Shareholders and the Company's Future
Net income is profit calculated under accounting rules, so it includes money not yet received, like the price of goods sold on credit. That means it can differ from the actual cash in the bank. Still, it isn't just a number written in a ledger. The money earned through a year of hard work becomes the key fund that decides the company's next move.
First, the company can share dividends with the shareholders who trusted it and invested, as a thank-you. What's left after dividends is saved up in the company's storehouse and reinvested, for example in building a state-of-the-art factory for the future or in research to develop new products.
To be a bit more precise, net income (the part belonging to common shareholders) divided by the number of common shares in circulation is called earnings per share (EPS). It shows how much net income each share earned. Companies whose EPS keeps growing steadily are seen as solid companies.
Common misconceptions
If net income jumps, the company must be doing great in its main business.
Even if the main business lost money, selling buildings, land, or shares can make net income jump for a while. Check the income statement to see whether the gain is one-time or comes from the main business.
Where you meet it
A cafe has 10 million won in monthly sales. After subtracting coffee beans, rent, part-timer wages, loan interest, and taxes, the 2 million won left is its net income.
A company earns 10 billion won in net income. It decides to pay 3 billion won to shareholders as dividends and keep 7 billion won in the company for future AI research and development.
In one sentence
It's a company's final pure profit: total sales minus cost of goods, operating costs, financial costs, and taxes, every expense there is.