Gross Profit vs. Net Income: What's the Difference?

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Gross profit is revenue minus the cost of goods sold (COGS). Net income is revenue minus all expenses, including operating costs, interest and taxes, plus any other income. Gross profit shows how much a company earns from making and selling its product before overhead. Net income is the bottom line, the profit the business keeps.

Gross Profit: Revenue Minus the Cost of Sales

Gross profit is what remains after a company pays for the goods or services it actually sold:

Gross profit = Net sales − Cost of goods sold

It answers a narrow question: does the core product make money before rent, head-office salaries, marketing and financing costs come into play?

What counts as revenue

Revenue is money earned from a company’s primary business. For a bookstore, that means sales of books, gifts and any in-store services. A lawsuit settlement or an insurance payout would not count as revenue, because neither comes from selling the company’s goods.

The figure used for gross profit is usually net sales: gross sales minus returns, allowances and discounts. Net sales (or net revenue) is a revenue line, not a profit. It still has COGS to come out of it, so net revenue and gross profit are different numbers.

What counts as COGS

COGS, also called cost of sales or cost of revenue, covers the direct costs of producing or acquiring what was sold. For the bookstore, that would include:

• The purchase cost of the books that were sold
• Shipping to get that inventory into the store
• Wages for staff directly serving customers and handling sales

What belongs in COGS varies by industry and accounting policy. A manufacturer includes raw materials and factory labor. A software or services company reports a “cost of revenue” built from items such as hosting and delivery staff. Only costs tied to units actually sold during the period land in COGS. Unsold inventory stays on the balance sheet.

Net Income: Profit After All Expenses

Net income is the money left after every expense for the period has been deducted and any extra income has been added. It also goes by net profit, net earnings, profit after tax, or net income available to shareholders.

One way to write it, starting from gross profit:

Net income = Gross profit − Operating expenses − Other business expenses − Interest on debt − Taxes + Other income

What sits between gross profit and net income

The items below gross profit typically include:

• Operating expenses: marketing, salaries outside production, rent, utilities, insurance and general administrative costs (often grouped as selling, general and administrative expenses, or SG&A)
• Depreciation and amortization: the cost of long-lived assets spread over their useful lives
• Interest expense: the cost of loans and other debt
• Taxes: income tax owed on the period’s profit
• Other income or gains: interest earned on cash, gains on selling assets, or investment income
• One-time items: restructuring charges, impairments or gains on selling a business unit

Interest on debt is subtracted on the way to net income, not from sales to get gross profit.

A worked example

Take a hypothetical company with $1 million in revenue for the year and these figures:

• COGS: $600,000
• Operating expenses: $200,000
• Interest on debt: $10,000
• Taxes: $5,000
• Interest income: $8,000

Gross profit = $1,000,000 − $600,000 = $400,000, a 40% gross margin.

Net income = $400,000 − $200,000 − $10,000 − $5,000 + $8,000 = $193,000, a net margin of 19.3%.

The $207,000 gap between the two figures is the overhead, financing cost and tax burden that gross profit ignores. Two companies with identical $400,000 gross profits could end up with very different net income if one carries heavy debt or a large head office.

Gross Profit vs. Net Income Side by Side

Gross profit:

• Deducts only the cost of sales from revenue
• Reflects how well production, purchasing and direct labor costs are managed
• Appears high on the income statement, right after revenue and COGS
• Signals operational efficiency at the product level
• Used to calculate gross margin (gross profit ÷ revenue)

Net income:

• Deducts every expense from revenue and adds other income
• Reflects management of the entire cost structure, including overhead, debt and taxes
• Appears at the bottom of the income statement
• Indicates the company’s capacity to reinvest, grow and pay shareholders
• Used for net margin, earnings per share and the price-to-earnings ratio, and in lenders’ credit assessments

Gross profit is normally the larger of the two, because net income starts from gross profit and usually has more costs taken out. The exception comes when other income or one-time gains are large enough to outweigh all expenses below gross profit, which is uncommon.

Where to Find Them on the Income Statement

Both figures come from the income statement (also called the profit and loss statement). A typical layout runs:

1. Revenue (net sales)
2. Cost of sales
3. Gross profit
4. Operating expenses (SG&A, research and development, depreciation)
5. Operating income
6. Interest and other income or expense
7. Pretax income
8. Income tax
9. Net income

Some companies do not print a gross profit line. In that case you can calculate it by subtracting cost of sales from revenue. Labels also vary. Gross profit may appear as gross income, sales profit or even “gross margin,” even though gross margin usually means the percentage. Net income may appear as net earnings or profit after tax.

Net income is an accounting profit, not cash. Under accrual accounting it includes non-cash charges such as depreciation and counts sales that customers have not yet paid for. The cash flow statement reconciles net income to the cash the business actually generated.

What Each Figure Tells You

Gross profit shows how a company handles its most controllable, production-related costs. Management uses it to:

• Spot cost-cutting opportunities in sourcing and production
• Set prices that cover direct costs with room to spare
• Compare the profitability of product lines, or of an old process against a new one

Investors use gross profit, usually converted into gross margin, to compare similar companies and see which one has a better grip on its variable costs.

Net income answers the question many investors care about most: how much of the money coming in does the company keep? It determines whether a business can fund its own growth, pay dividends and service debt. Lenders look at it when assessing creditworthiness. It also forms the “E” in the price-to-earnings ratio, which investors use to judge whether a stock looks cheap or expensive relative to its profits.

Real-World Examples

The two public companies below show how far the gap between gross profit and net income can vary.

Best Buy (fiscal 2024)

In its 2024 fiscal year, Best Buy reported revenue of $43.45 billion and cost of sales of $33.85 billion, leaving a gross profit of $9.6 billion. That is a gross margin of roughly 22%.

Below gross profit came SG&A expenses, restructuring charges and income taxes, offset partly by investment income and a gain on the sale of a subsidiary. The result was net earnings of $1.24 billion, just under 3% of revenue. Most of Best Buy’s revenue went to buying the products it resells, and most of the remaining gross profit went to running stores and the business.

Apple (quarter ended Dec. 28, 2024)

For the three months ended Dec. 28, 2024, Apple reported net sales of $124.3 billion and cost of sales of $66.03 billion. That left $58.28 billion of gross profit, which Apple labels “gross margin” on its statement. Cost of sales consumed about 53% of revenue.

After operating expenses, other income and expense, and taxes, net income came to $36.3 billion, about 29% of net sales.

The Best Buy figures cover a full fiscal year and the Apple figures cover one quarter, so the dollar amounts are not directly comparable. The percentages are. Apple kept about 29 cents of each sales dollar as net income in that quarter, compared with under 3 cents for Best Buy over its fiscal year. Much of that difference starts at the gross profit line. A retailer reselling other companies’ products typically earns a thinner gross margin than a company selling its own products.

Special Considerations

Gross profit with a net loss. A company can report positive gross profit and still lose money. If gross profit is $500,000 but operating costs, interest and taxes total $650,000, the result is a $150,000 net loss. This pattern points to overhead or financing costs, not the product itself, as the source of the loss. When gross profit is negative, the business loses money on every sale before any overhead is counted.

One-time items distort net income. Asset sales, restructuring charges and impairments can push net income well above or below its usual level in a single period. Best Buy’s fiscal 2024 figure, for example, included a gain on a subsidiary sale. Looking at operating income alongside net income helps separate recurring profit from one-offs.

Comparisons work best within an industry. What counts as a strong gross margin for a software firm would be unrealistic for a grocer. Compare companies with similar business models, and compare the same company across periods.

Small differences in accounting software. If your bookkeeping tool shows slightly different “income” and “gross profit” figures, check how it classifies discounts, returns, shipping charges and certain direct costs. Placing them in a revenue adjustment or in COGS changes net sales or COGS, and therefore gross profit.

FAQs

The Bottom Line

Business owners, managers and investors reading an income statement need both figures. Gross profit shows whether the core product covers its direct costs, while net income shows what the company actually keeps after overhead, debt and taxes. Compare margins within the same industry, check operating income to filter out one-time items, and remember that net income is an accounting profit, not cash.