Residual Income

Residual Income is a measure of the profit a company generates in excess of the return required by its equity holders. It is the equity-side counterpart to Economic Value Added (EVA), and underpins the Residual Income Model, an alternative equity valuation lens to a traditional Discounted Cash Flow (DCF) that is particularly useful when a company’s free cash flows are negative or unpredictable but its accounting earnings are more stable.

The formula is as follows:

Also known as: RI, economic profit (equity variant), abnormal earnings.

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Calculate the Residual Income in Python

The Residual Income is available in the Models module of the open-source Finance Toolkit. Install it with:

pip install financetoolkit -U

Then call get_residual_income as shown below.

from financetoolkit import Toolkit

toolkit = Toolkit(["AAPL", "MSFT"], api_key="FINANCIAL_MODELING_PREP_KEY")

toolkit.models.get_residual_income().loc["AAPL"]

Which returns:

Parameters

get_residual_income accepts the following parameters:

• rounding (int, optional): The number of decimals to round the results to. Defaults to None.
• growth (bool, optional): Whether to calculate the growth of the values. Defaults to False.
• lag (int | list[int], optional): The lag to use for the growth calculation. Defaults to 1.
• standardize (bool, optional): Whether to standardize (Z-Score) the result. When combined with growth=True, standardizes the growth values instead of the raw values. Defaults to False.
• trailing (int | None, optional): The trailing period to use for the calculation. Defaults to None.
• show_columns (list[str] | None, optional): List of columns to show in the results. If None, all columns will be shown. Defaults to None.

Related Models

The Models module page introduces the module, and the sidebar lists all of its functions.