In the case of Company A, adjusting gross profit by other income and various expenses, such as the $18.4 billion that the company spent on SG&A, and the $2.2 billion it spent on taxes, leaves us with a net income of $7.1 billion.
Without digging deeper, an investor is left knowing only that Company A is profitable in its most recent year. However, if an investor considers Company A's net income relative to its net income in prior years, a clearer understanding of profitability is achieved. In this case, an investor discovers that Company A's net income is lower than it was in each of the preceding two years.
Because Company A's net income has slipped, an investor now knows that more research is necessary to explain the profit slump.
Similarly, comparing Company A's net income to its competitors can also offer additional insight into how attractive the company may be as an investment.
Company B — a main rival of Company A — reports that its revenue is $66.7 billion, its gross profit is $35.8 billion, and its net income is $6.5 billion during the same period as Company A.
Company A's net income is higher than Company B's, but what what may make Company A more interesting to an investor than Company B is that more of Company A's revenue is falling to the bottom line than Company B's. Dividing each company's net income by their revenue shows that Company A's net income is 15.4% of sales, while Company B's is 9.7% of sales.
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