Translation: Finance Income = Finance income

Finance income is revenue earned by an entity from financing-related activities, such as interest accrued on deposits and financial investments, or returns generated by providing financing to third parties. This income is usually presented in the income statement and reflects the returns an entity earns by investing its funds or from its financial assets, rather than necessarily from its core operating activities.

In simple terms:
Imagine a company with excess cash that decides to deposit some of it in an investment account that earns a return. The amounts the company receives from this investment are considered finance income because they result from putting money to work and earning a return, rather than from selling products or providing services.

Note:
Finance income differs from operating revenue. Operating revenue is generated by a company’s core activities, such as selling products or providing services, while finance income arises from activities and returns associated with funds and financial instruments.
Finance income should also be distinguished from finance costs, which are expenses an entity incurs for borrowing or obtaining financing.

Example:
Suppose a company has excess cash of one million riyals and decides to deposit it in an investment account that earns an annual return of 5%.
At the end of the year, the company earns a return of 50,000 riyals from the deposit.
This amount is recorded as finance income because it results from investing funds and earning a return, rather than from the company’s core activities.
Therefore, when a company reports an increase in finance income, it means that it has earned greater returns on its funds or financial assets, which may contribute to an increase in its net profit.

What does this mean for you?

  • Diversifying income sources: Finance income helps generate additional returns alongside revenue from a company’s core activities.
  • Putting available cash to work: It reflects a company’s ability to make use of its available funds through deposits, investments, and income-generating financial instruments.
  • Analyzing financial performance: Understanding finance income helps distinguish between profits generated by operating activities and those generated by investing funds, giving investors a clearer picture of the sources of a company’s profitability.

Frequently asked question:
Does an increase in finance income necessarily mean that the company’s operating performance has improved?
Answer: No. An increase in finance income may increase a company’s net profit, but it does not necessarily mean that its core business has improved; the increase may result from higher returns on deposits or financial investments. It is therefore important to analyze operating income and finance income separately to get a more accurate picture of the company’s performance.

What if it is negative?
Finance income, by definition, is not negative, because it is a return a company earns on its funds.
However, some companies present a single line item in the income statement called net finance income, which is finance income after deducting finance costs.
If this line item is negative, it means the company pays more on its loans than it earns from its deposits and investments.
In that case, the line item is usually called “net finance costs,” and it reduces net profit.

Example: A company earned finance income of 50,000 riyals and paid finance costs of 80,000 riyals. The net amount is negative 30,000 riyals.
This does not necessarily mean the company is in poor condition; it may have borrowed to fund its expansion. The more important question is: does operating profit comfortably cover finance costs?