Other Operating Income/Operating Income (%)Other operating income includes revenue from all other operating activities which are not related to the principal activities of the company, such as gains/losses from disposals, interest income, dividend income, etc.
We are concerned with companies that have high levels of other operating income relative to their industry peers as it suggest that earnings are of relatively low quality. For example, some companies consistently meet earnings expectations by generating asset disposals. We would argue that this is not a recurring income source and should be discounted. However, some business models generate higher levels of other operating income than others. For example, retail companies might generate recurring rental income or discounts from suppliers which appears as other income. Indeed, retailers tend to generate other operating income in excess of 14% of total operating income, as shown in Figure 69. Only 22% of the 16.000 companies in our Bloomberg sample reported other operating income; the median average equated to 10% of operating income.
Our accounting screen is set to trigger a red flag when other 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 other operating income /operating income exceeds the 80th percentile relative to the change experienced by GICS industry peers between 2010 and 2015.