What does Net Profit represent?

Net Profit is a financial metric that reflects the amount of money a business has earned after all expenses have been deducted from its total revenue. This figure is critical for assessing the profitability of a business because it accounts for all costs—including operating expenses, taxes, interest, and other necessary expenditures—resulting in the final profit that is available to shareholders or for reinvestment back into the business.

When a business calculates its net profit, it starts with total revenue and subtracts both direct costs, represented as Cost of Goods Sold (COGS), and all operating expenses. The resulting figure indicates the overall financial health and operational efficiency of the business. It provides stakeholders with insight into how well the company is managing its costs and can signify its potential for growth and sustainability.

In contrast, while the difference between Gross Profit and expenses does relate to profitability, it is more specific and doesn’t encompass all the required deductions to determine Net Profit accurately. Overall, Net Profit is often regarded as the most comprehensive measure of a company's profitability, making it a key figure for investment and operational decisions.