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All that glitters is not gold

If the income from other sources constitutes a major part of a company's total profits, it could be a red flag for investors

All that glitters is not gold

Who doesn't love extra income? Income from other sources has the potential to increase a company's total earnings. Then, what's the problem with the income deriving from other sources?

Problem arises when the other income, which is not from a company's regular business activity, constitutes a major part of its total income. The companies in table 'High component of other income' have fallen prey to the similar situation. For these companies, the 'other income' portion has accounted for at least 50 per cent of the total profits before paying for taxes or interest in the last three years. Therefore, the absence of the other income would have resulted in very low profits for some and losses for others.

These companies have derived other income from different sources, including dividend income from their investments, interest income on deposits, profits from the sales of assets, any gain on foreign exchange, etc. However, not to forget, these types of gains are not sustainable in the future and hence, are not reliable as far as the future growth of these companies is concerned. Further, a higher contribution of other income to the total profits suggests that the company's primary business activity is unable to generate enough profits and hence, the portion of other income looks even bigger.

There shouldn't be any problem if other income would have increased a company's return on the equity (ROE). However, while looking at the ROE of these companies, we have seen that most of them had ROE in single digit and failed to generate enough returns for their owners. Thus, investors should always check a company's income sources and their reliability.