What Is Net Income Growth, and How to Calculate It?

What Is Net Income Growth, and How to Calculate It

If you're an investor, you'll want to know about net income growth and how to calculate it. This figure tells you how much a company grows its net income each year. It's an important metric to watch when investing in stocks, because it can give you a good idea of how well the company is doing. In this blog post, we'll explain what net income growth is and teach you how to calculate it yourself!

What is Net Income Growth, and why is it important?

Net income growth tells you how much a company's net income has increased over a period of time. It is an essential metric for investors because it can be used to measure the company's financial health or compare its performance to other companies in the same industry. In addition, companies that have growing net incomes are often seen as more stable investments, since they are making money and not just spending it.

A company with higher income growth is also seen as a potentially better investment because it usually means that the company is becoming more efficient – either increasing its sales or cutting costs. It also enables expansion opportunities as the company can use its profits to reinvest in itself and grow or provide returns to shareholders via stock buybacks or dividend payments.

How to Calculate Net Income Growth?

There are two methods for calculating a company's net income growth: the period-over-period method or the compounded growth method.

Period-over-period method

The period-over-period method involves taking the net income for a specific time period, such as the current fiscal year, and subtracting it from the net income of the previous fiscal year. This gives you the change in net income from one fiscal year to another. The formula for this is:

Net Income Growth = (Current Period Net Income – Previous Previous Net Income)/Previous Previous Net Income

For example, if a company had a net income of $100 million in 2018 and $110 million in 2019, the change in net income would be:

Net Income Growth = ($110million – $100 million)/$100 million = 10%

This method is most effective when used to compare two consecutive years, but you can also use it to compare more than two time periods.

Compounded growth method

The compounded growth method involves taking the net income of one time period, such as the current fiscal year, and then calculating the average annualized rate of change over a number of years. To do this, you can use the following formula:

Compounded Growth Rate = ((Current Period Net Income/Previous Period Net Income)^(1/(Number of periods)) – 1).

For example, if a company had a net income of $100 million in 2017 and $110 million in 2020, the compounded growth rate would be:

Compounded Growth Rate = ($110million / $100 million)^(1/3)-1 = 3.22%

This method is most effective when used to compare more than two years, and it gives you an average rate of growth over that period.

Net income growth calculation example

Let's say you are analyzing Apple's Inc Net income growth from 2022 until 2018. The net income figures for those years are as follows:

2018 = $265,595 billion

2019 = $260,174 billion

2020 = $274,515 billion

2021 = $365,817 billion

2022 = $394,328 billion

Using the period-over-period calculation method, the net income growth between 2019 and 2020 would be:

Net Income Growth = ($274,515 billion – $260,174 billion) / $260,174 billion = 5.51%

Using the compounded growth rate calculation method, the net income growth between 2018 and 2022 would be :

Compounded Growth Rate = (($394,328 billion/$265,595 billion)^(1/(2022-2018)) – 1) = 10.38%

In this case, using the compounded growth rate calculation method makes more sense, as it gives you an average growth rate over a four-year period.

Automatic Net Income Growth Calculation

Instead of manually calculating net income growth for every company you analyze, you can get this number atomically on your spreadsheet using Wisesheets.

For example, to get Apple's net income growth in 2022, all you need to do is enter the following formula in any cell:

=WISE("AAPL", "net income growth", 2022).

net income growth excel

As you can see, this will return the period-over-period net income growth for the company.

Using this formula, you can easily compare the net income growth for many companies in the same industry and find potential investment opportunities like this:

Net income growth comparison spreadsheet

Better yet, you can get countless other stock data on your spreadsheet, including financials, key metrics, dividend data, live stock data, etc. You can try this for yourself here.

Factors that Affect Net Income Growth

When analyzing income growth, it is essential to consider what factors may be influencing the numbers. These can include:

  • Changes in pricing or sales volume
  • Changes in production costs
  • Changes in inventory levels
  • Changes in tax rates or government regulations

It is also important to note that accounting practices or one-time events can sometimes influence this measure.

By understanding the factors that affect income growth, you can better understand how well a company is performing and make more informed decisions about investing in its stock.

Common Pitfalls to Avoid When Calculating Your Net Income Growth

When calculating your net income growth, there are a few common pitfalls to avoid.

First, make sure you are using the correct time periods when comparing net incomes. If you use different fiscal year-end dates or compare one-time events or accounting practices, it can skew your results.

Second, be aware of the factors that may be influencing the results. For example, if there is a change in pricing or sales volume, this could significantly affect the net income growth rate.

Finally, make sure you are using the appropriate calculation methods. For example, while both period-over-period and compounded growth rates can be used to calculate income growth, one may be better suited for your particular analysis.

By avoiding these common pitfalls and using the appropriate calculation methods, you can better understand how well a company is performing and make more informed decisions about investing in its stock.

Conclusion

Net income growth can be an essential indicator of a company's financial health, and understanding how to calculate it is essential for any investor. By using the appropriate calculation methods, taking into account any factors that may be influencing the results, and avoiding common pitfalls, you can better understand how well a company is performing and make more informed decisions about investing in its stock.

By using Wisesheets, you can automatically get net income growth numbers and use them to compare the performance of different companies in the same industry. This can help you identify potential investment opportunities and make more informed decisions about investing in stocks. Try it for yourself today!

To your investing success!

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing and facilitating over a billion dollars in commercial real estate deals.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies.

That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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