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. The formula for calculating the net income component percentage is net income divided by total sales.
About 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.
Purpose of Component Percentage Analysis
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.
Example of the Calculation
To demonstrate by example, assume 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. So, 100 x 0.30 = 30. The net income component percentage is 30 percent.
Significance of Calculating the Percentage
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 percentage from the previous year to the current year, it means the company was not as profitable in the current year. If there is an increase in the net income percentage from the previous year to the current year, it means the company was more profitable in the current year than the previous one.