netamorphosis is a metrics-driven digital transformation agency, which is why we would often rely on data—in the form of numbers, percentages and figures—to show objectives, achievements and results within our a-to-z suite of services.
One of such ‘key’ figures is the ‘net income percentage’. This % number describes the gain (or loss) in net income of a business over a given amount of time, thus allowing us to establish what the ROI (return rate) of a specific investment has been.
With digital and more traditional types of businesses alike, the concept of net income is also known as net profit ratio or as profit margin, and can be expressed either as a number or as a percentage. At neta we would mostly use the % rather than the pure net income number, as that allows us to immediately visualize and monitor growth over time, which is why—to determine the profitability of a businesses or eCommerce site—we would periodically derive and then analyze the total net income % relative to their total profit, or their gross sales revenue.
THE MATH BEHIND NET INCOME %
Calculating a business’ net income percentage is less complex that it sounds. After having defined which timeframe you will want to look at:
#1: calculate the net income (= the profit: the amount of money your business generates after all expenses have been cleared. This number is computed subtracting the cost of goods sold, expenses and taxes to an entity’s gross income)
#2: simply divide this amount by the total revenue your business has generated within the pre-established timeframe
#3: multiply this number by 100, to derive a %
Note that when calculating net income growth for multi-year periods, net income growth is usually compounded.
Calculating a business’ net profit margin offers several advantages and serves different purposes.
It can for instance be a useful comparison tool to assess a business against its competitors, but also to compare current performance trends with historical results. Net income is also crucial for ratio analysis and financial statement analysis purposes: since it would highlight if a company is generating profits (or not) and how much, it is often seen as one of the principal sources of compensation to shareholders, as well as a key determinant in stock prices fluctuations – which is why this % also plays into the overall perception of a business, as stocks with higher net income growth rates are typically more desirable than those with lower net income growth rates.
In our +10 years experience we have seen how investors are particularly enamored by companies with net income growth or EBITDA (Earnings Before Interest, Tax, Depreciation or Amortization) in the double digits or greater than 10% growth, and equally important are those companies that have accelerated earnings growth. Clearly, more mature firms will have lower, more constant levels of growth and typically compensate investors with greater dividends instead of high growth rates. Smaller and raising new enterprises would achieve more impressive results, but will also be subject to further potential fluctuations. As part of this, net income shifts and changes are often under scrutiny, and even if ultimately they all would tend to result in similar types of problems (i.e. fewer conversions and/or sales), they can be traced back to a number of different issues, such as poor CRM, bad UX, inefficient SEO and so forth.
Precisely for these reasons, calculating and boosting the net profit margin percentage of our clients—before, during and after our joint work with them—planning so to ensure the objective is achieved, is a pivotal key metric within neta’s growth process.
This figure can help us highlight the rate of return at which companies that undergo our digital transformation have grown their profits: to ensure our results meet and exceed client’s expectations, we would focus on ad-to-sales ratio balance for both our budget planning and our performance phases, ensuring we deliver new revenues and a net income rate (profitability) for the businesses we work with, within the ambitious timeline of a 3-year time period. neta’s agile and lean approach throughout all phases (from discovery to optimization) and our Performance Management capacity, make this acceleration feasible, and puts us in the right track for KPI’s bound to perform ahead of projections and industry trends.
We firmly believe in defining both topside revenue growth rates (CAGR – Compound Annual Growth Rates) and net income growth rate projections as indicators of performance management, that target both accelerated bottom line growth trajectories and the most expedient timeline possible for recouping CapEx (capital expense) within all of our overarching website platforms set-up work.