Net profit

What it means

Net profit is a positive profit or loss for the period after tax, the amount left from revenue after deducting all costs including interest and income tax. It is the bottom line of the profit and loss statement.

Unlike EBIT or EBITDA it includes the effects of financing and tax, so it shows what the company actually earned for its owners. It is the basis for return on equity and earnings per share.

Net profit is not the same as cash. A company can be profitable and still lack money, for example when it has many unpaid receivables or has invested in inventory and assets.

How it works in practice

The general meeting decides how net profit is used when approving the financial statements. It may distribute it to shareholders, transfer it to funds, keep it as retained earnings or use it to cover losses.

Before paying out profit shares, the solvency test must be passed and any required allocation to the reserve fund under the articles made. Profit shares paid to individuals are subject to withholding tax.

Banks and investors look at the trend and quality of net profit. One-off income, such as from selling assets, boosts profit but says nothing about the ongoing business.

What to watch out for

Low net profit does not necessarily mean poor management. Companies sometimes deliberately report lower profit through higher director pay or investment, but weak results make borrowing harder.

Comparing net profit with the tax return requires understanding the differences between the accounting and tax bases. Non-deductible costs and add-backs mean the tax does not equal 21 % of accounting profit.