After-tax income

Definition

After-tax income is the amount of money that remains from gross income after all taxes have been deducted. It is often used to measure the actual profitability and financial health of an individual or a business segment.

5 Must Know Facts For Your Next Test

1. After-tax income is crucial for evaluating the true performance of an operating segment or project.
2. It provides a more accurate reflection of profitability compared to pre-tax income.
3. Return on Investment (ROI) calculations often incorporate after-tax income to ensure more realistic assessments.
4. Residual Income and Economic Value Added (EVA) metrics utilize after-tax income to measure value creation beyond required returns.
5. Understanding after-tax income helps in making informed decisions about investments, budgeting, and performance evaluations.

Review Questions

• Why is after-tax income considered a more accurate reflection of profitability compared to pre-tax income?
• How does after-tax income influence Return on Investment (ROI) calculations?
• What role does after-tax income play in Residual Income and Economic Value Added (EVA) measurements?

Related terms

Gross Income: The total revenue generated before any deductions or taxes are applied.

Return on Investment (ROI): A measure used to evaluate the efficiency of an investment, calculated as net profit divided by initial cost.

Economic Value Added (EVA): A financial metric that calculates the value created above the required return on a company's capital.