The net profit is the amount left from total revenues of the company after deducting all the expenses, showing what the company has earned in a given period of time, or what is available to the final owners of the company i.e. equity shareholders. Sometimes, net profit is also known as Profit after tax (PAT).
Here, it is important to note that net profit is not a measure of how much cash a company earned during a given period. This is because the income statement also includes credit sales and also a lot of non-cash expenses like depreciation and amortization.
Net profit varies greatly from company to company and from industry to industry, as profitability matrix of each business is different at different points of time. E.g. Indian telecom industry was viewed as a cash cow in early 2000s but competitive pressures and technological changes lead to most domestic telecom players bleeding heavily for the past few years.
Changes in net profit are studied closely by investors and analysts. Because that is the final compensation which equity shareholders have earned for the investment in a company’s equity shares. If a company is not genrating enough net profit to compensate the shareholders or increase the value of the company, the value of shares will plummet. In general, whenever a company is reporting low or negative net profits, various problems are to be blamed, ranging from decreasing sales, exceptional losses, inadequate expense management etc. Conversely, if a company is healthy and growing, stock prices will be higher, reflecting the increased availability of profits.
Net Profits are compared to sales of the company since each and every company varies in size and is represented in the form of net profit as a percentage of sales, known as ‘net profit margin’. Another common ratio is the price-to-earnings ratio (PE ratio), which tells investors how much they are paying (the stock's price) for each rupee of net profit the company is able to generate.