Non-operating income includes items such as foreign exchange gains/losses, non-recurring and one-time events which are not considered extraordinary items, such as restructuring, spin-off/sell off, merger and acquisition, sale of subsidiaries and write-downs. Normally, it would include affiliate income/losses but we have excluded it for the purposes of this analysis.
We penalise companies with a high and rising amount of non-operating income relative to industry peers. In general, companies with a higher level of non-operating income are regarded as having poorer earnings quality. Some business models generate higher levels of non-operating income from others, as shown in Figure 71, and for the purposes of our database we compare on an industry basis. Around 76% of companies in our sample of 16,000 recorded non-operating income between 2010 and 2015; the median average equated to 10% of operating income.
Our accounting screen is set to trigger a red flag when non-operating income/operating income exceeds the 80th percentile relative to its GICS industry peers, and/or when there is an abnormally large increase relative to the normal rate of change amongst industry peers over one and three years. This latter red flag is triggered when the increase in non-operating income/operating income exceeds the 80th percentile relative to the change experienced by GICS industry peers between 2010 and 2015.
