Financial analysts calculate the net income component percentage when completing a vertical analysis of a company’s income statement. Doing so allows analysts to compare the company’s sales, costs and expenses for different periods to gauge its financial performance within a given period. So, it’s an important metric, alongside others like cash flow from operations, for investors and business owners evaluating companies and their financial health.
To calculate your company's net income component percentage, you must first divide net income by total sales. Once this calculation has been completed, you can multiply the resulting figure by 100 to convert it into a percentage.
Therefore, the net income component percentage can be summarized as follows:
Net Income Component Percentage Formula = (Net Income / Total Sales) x 100%
The Formula to Find Net Income
You shouldn’t confuse gross income or operating income with net income. According to Investor.gov, net income refers to your company’s profits after all its taxes and other expenses, including production costs, have been deducted from its revenue. The resulting amount of money is sometimes referred to as net earnings. If you look at an income statement template, you can find it at the bottom as the value in the bottom line.
It is one of the two primary components of a net income component percentage. So, you need to know how to find that total amount of money left over first. It is also worth noting that depreciation and amortization may also be deducted from revenues when calculating net income.
On the other hand, gross income can be equated with total sales before any deduction of expenses. Further, operating income is the amount of money left over from revenues after operating costs and the cost of goods sold have been deducted, but before income taxes and interest expenses are taken out.
Net income formulas can be expressed in several ways, though you can use a net income calculator to simplify the work.
For starters, according to My Accounting Course, you can express net income as follows:
Net income = Total Revenues – Total Expenses
You can also break down that formula and express it as follows:
Net income = Revenues – Cost of Goods Sold (COGS) – Taxes – Expenses – Interest on Debt
In this case, the total revenues of any large or small business may also be expressed as gross income or total income.
What Are Component Percentages?
A component percentage analysis shows the relationship between specific line items on a financial statement and the total amount on the statement. For example, to calculate the net income, take the total sales and subtract expenses and taxes. To show the relationship between the line item – sales and the total amount that includes the line item – and net income, you divide net income by total sales. The result is the net income component percentage.
What Is the Implication of Net Income Component Percentage?
When performing a component percentage analysis, analysts are able to determine the distribution of sales revenue dollars. A net income component percentage analysis shows the percentage of sales dollars that goes toward net income or profits.
For example, if a company’s net income component percentage is 50 percent, it means that 50 percent of its total sales goes toward the company’s profits. The remaining 50 percent goes toward paying expenses and taxes.
Net Income Component Percentage Calculation
Here is an example of how to calculate net income component percentage.
Suppose a company has $50,000 in sales for the year. Its expenses, such as the cost of goods sold, operating expenses, interest expenses and income taxes total $35,000. This makes net income $50,000 – $35,000 = $15,000.
To find the net income component percentage, the company divides net income by total sales so that $15,000 / $50,000 = 0.30. The company must then change the decimal into a fraction by multiplying it by 100 percent. So, 100 percent x 0.30 = 30. Therefore, the net income component percentage is 30 percent.
That implies that 30 percent of the company’s revenues go toward its profits, while 70 percent goes towards its expenses.
What Is Net Income Component Percentage Used For?
Calculating the net income component percentage allows analysts to compare the rise or decline in net income for a company from one year to the next.
If there is a decline in the net income component percentage from the previous year to the current year, it means the company was not as profitable in the current year and may have even had a net loss. On the other hand, if there is an increase in the net income component percentage from the previous year to the current year, it means the company’s net profits were more in the current year than the previous one. The higher profit margins imply the business is doing something right.