Net profit is built step by step in the income statement by adding three intermediate results and then subtracting tax.
Full formula:
Net profit = Operating profit + Financial profit + Exceptional profit − Employee profit-sharing − Corporate tax
The three components:
Adding these gives the profit before tax, from which corporate tax is subtracted to arrive at net profit.
Let’s take an SME in the services sector over a financial year:
| Item | Amount |
|---|---|
| Revenue | €500,000 |
| Operating expenses | −€410,000 |
| Operating profit | €90,000 |
| Financial expenses (interest) | −€8,000 |
| Profit before tax | €82,000 |
| Exceptional result | €0 |
| Corporate tax | −€18,250 |
| Net profit | €63,750 |
The company generates a net profit of €63,750. This amount can be distributed to partners as dividends, allocated to reserves to strengthen equity, or carried forward. Net profit also increases equity on the balance sheet.
Net profit is often confused with other financial metrics. Each measures something different.
| Metric | What it measures | Includes tax? | Includes depreciation? |
|---|---|---|---|
| EBITDA | Gross operating performance | No | No |
| Operating profit | Performance after depreciation | No | Yes |
| Net profit | Final enrichment | Yes | Yes |
| Cash flow | Potential cash generated | Yes | Adds back depreciation |
Key point: net profit is an accounting metric, not a cash flow indicator. A company can show a net profit and still lack liquidity (uncollected receivables, high inventory). This is why it should always be supplemented with a cash flow analysis. A tool like Orizen links the income statement and cash flow tracking to avoid this common pitfall.
Discover the Orizen answer: Orizen accounting software, modular and built for French SMEs.
Essai gratuit 14 jours What the Orizen accounting software module costsThey are two sides of the same figure. Net profit is the neutral accounting term: it can be positive (then called profit) or negative (then called a loss). Saying "profit" therefore implicitly assumes a positive net profit. In the income statement, this balance appears in account 120 (profit) or 129 (loss) depending on its sign.
No, and this is a common misconception. Net profit is calculated using accrual accounting: it includes uncollected income (accounts receivable) and non-cash expenses (depreciation, provisions). A company can be profitable while lacking cash. For cash flow, we look at operating cash flow, the cash flow forecast and the cash flow statement.
After the accounts are approved, the shareholders' meeting decides how to allocate it: distribution as dividends, allocation to reserves (legal, statutory or free) to strengthen equity, or carry-forward to the next financial year. Profit allocated to reserves increases equity and thus the company's financial strength.