Definition
The term investment income performance is used to describe a measure that allows analysts to understand the overall rate of return on a company’s investment activities. This metric can be used to determine the effectiveness of the assets appearing as long and short term investments on the balance sheet.
Calculation
Investment Income Performance (%) = ((Dividend Income + Interest Income) / (Investments)) x 100
Where:
Dividend and Interest Income are recorded on an accrual basis to eliminate the effects of timing differences.
Investments include the total of all long and short-term income-producing accounts and securities such as money market funds, as well as stocks and bonds of other companies.
Explanation
Operating performance measures allow the investor-analyst to understand how well a company is performing with respect to sales, margins, and profits. One of the ways to measure the effectiveness of a company’s investment portfolio is by calculating their investment income performance. This measure takes all of the income derived from stocks and bonds of other companies, in addition to money market accounts, and divides this value by the total of the company’s long and short term investments.
To remove the effects of a timing difference, the dividend and interest income values should be stated on an accrual basis. That is to say, this is the money earned in the current period, even if the funds have not yet been received due to a timing difference.
It should be noted that many companies will invest excess funds in relatively safe securities, which would also provide low yields. Abnormally high rates of return suggest a company is taking a risky approach to their investments. In addition to examining the investment income performance of a company, the investor-analyst should also investigate the ratings of these securities.
Example
Company A’s balance sheet indicates they had several million dollars of assets tied up in long and short term investments. The notes to Company A’s balance sheet and income statement provides the following insights into sources of non-operating income.
Investment | Income | |
Bonds | $2,500,000 | $112,500 |
Common Stock | $1,875,000 | $65,600 |
Money Market Funds | $625,000 | $9,375 |
U.S. Treasury Bills | $175,000 | $5,250 |
Total | $5,175,000 | $192,725 |
From the above information, the investor-analyst was able to calculate Company A’s investment income performance as:
= ($192,725 / $5,175,000) x 100, or 3.72%
This value was subsequently compared to other organizations in the same industry to see if Company A’s performance was lower or higher than its peers.
Related Terms
The term goodwill to assets refers to a ratio used by analysts to estimate the impact the intangible asset goodwill has on a company's balance sheet. SFAS No. 142 instructs companies to write off goodwill as it becomes impaired. Without a need to amortize goodwill over time, it's important for the investor-analyst to understand the affect goodwill has on assets, and whether or not this value is rising or falling over time.
Moneyzine EditorJanuary 19th, 2024- The term overhead to cost of sales ratio is used by analysts to estimate the impact overheads have on the company's cost of goods sold. The overhead to cost of sales ratio provides company management with insights into the growth of overheads as sales increase over time.Moneyzine EditorSeptember 20th, 2023
- The term revenue margin of safety refers to a calculation the investor-analyst can use to determine how much revenues can decline before the break-even point is reached. The revenue margin of safety is important to understand when a company has relatively few, but large, customers.Moneyzine EditorSeptember 21st, 2023
- The term revenue break-even point describes a calculation analysts can use to determine the level of revenues at which a company remains profitable. The higher a company's actual revenues are above their break-even point, the higher is their potential profitability.Moneyzine EditorSeptember 21st, 2023
The gross profit index is an operating performance measure that allows analysts to understand if the gross profit margin is changing significantly over time. When the gross profit index varies considerably from 1.0, it may indicate irregularities in the reporting of profits.Moneyzine EditorJanuary 19th, 2024- The operating income to sales ratio is a performance measure that allows analysts to understand the results from operations before unrelated items are added or subtracted. Investor-analysts will track this ratio over time, so changes in profitability can be quickly identified.Moneyzine EditorSeptember 20th, 2023
- The term operating profit margin is used to describe a measure that allows analysts to understand the rate of return from the core business operations of a company. This metric removes the effects of non-operating income activities such as the sale of assets.Moneyzine EditorSeptember 20th, 2023
