Final answer:
A residual income of zero indicates that a company has earned just enough profit to cover its cost of capital but has not generated additional profits. While it doesn't necessarily imply poor performance, it shows no extra value has been created for shareholders.
Step-by-step explanation:
For a company, having a residual income of zero does not necessarily indicate poor performance. Residual income is the net income a company generates above its cost of capital. It is calculated by subtracting the opportunity cost of capital from the company's operating profit. Essentially, it represents the excess profits after all costs, including the cost of capital, have been accounted for.
If a company has a residual income of zero, it means that the company has generated just enough profit to cover the opportunity cost of its capital. In this case, the company has met its financial obligations and cost of capital, but does not have any excess profits. It may not necessarily highlight poor performance, but rather it indicates that the company has not generated additional value beyond the minimum expected by its investors.
This measure is typically used by managers and investors to assess the profitability and performance of a company or investment. Comparing the residual income to that of past periods or to other companies might provide a more comprehensive understanding of performance.