What is the bottom line?
– The “bottom line” is ordinary-language for a company’s net income — the profit that remains after subtracting all expenses from all revenues during a reporting period. It appears as the final line on an income statement. The term is sometimes used loosely to mean earnings, profit, or (on a per-share basis) earnings per share (EPS). EPS is net income divided by the number of outstanding shares.
How the income statement leads to the bottom line
– Income statement structure (simplified):
1. Revenue (sales and other operating income) — the “top line.”
2. Cost of goods sold (COGS) — direct costs to produce goods sold.
3. Gross profit = Revenue − COGS.
4. Operating expenses (selling, general & administrative, R&D, etc.).
5. Operating income = Gross profit − Operating expenses.
6. Non‑operating items (interest income/expense, gains/losses).
7. Income before taxes.
8. Taxes.
9. Net income (the “bottom line”).
Step‑by‑step: how to calculate the bottom line
1. Start with total revenues for the period.
2. Subtract COGS to get gross profit.
3. Subtract operating expenses to get operating income.
4. Add/subtract non‑operating items to reach income before taxes.
5. Subtract income taxes to obtain net income.
Worked numeric example
Assumptions: simple company for one year; ignore rounded cents.
– Revenue: $200 million
– COGS: $80 million → Gross profit = $120 million
– Operating expenses: $50 million → Operating income = $70 million
– Interest expense: $5 million → Income before taxes = $65 million
– Taxes: $13 million → Net income (bottom line) = $52 million
Compare two ways to improve the bottom line (holding other items constant):
A. Boost revenue by 10% (to $220m), costs unchanged:
– New gross profit = 220 − 80 = $140m
– Operating income = 140 − 50 = $90m
– Income before taxes = 90 − 5 = $85m
– Taxes (assume same effective rate ≈ 20%): ≈ $17m
– New net income ≈ $68m → bottom line up from $52m to $68m (+30.8%).
B. Cut COGS by 10% (to $72m), revenue unchanged:
– New gross profit = 200 − 72 = $128m
– Operating income = 128 − 50 = $78m
– Income before taxes = 78 − 5 = $73m
– Taxes (≈20%): ≈ $14.6m
– New net income ≈ $58.4m → bottom line up from $52m to $58.