Purification means giving away the small part of your return that comes from impermissible income, usually interest the company earned on its cash. This guide shows the per-share method that Sanad's purification calculator uses, and then notes the other method you may meet.
The formula
Purification = (interest income ÷ the company's total shares) × the shares you own. Interest income comes from the company's income statement for the financial period, and total shares from its reported share count.
A worked example
This example uses round, illustrative numbers. Suppose a company earned $122.8 million in interest income in its latest period and has 1,137 million shares. Interest per share is 122.8 ÷ 1,137 = $0.108. If you own 100 shares, you purify 100 × $0.108 = $10.80.
The four rules
- Purification is made at the end of the financial period, quarterly or annually.
- You do not purify dividends separately under this method.
- You do not purify the profit from selling the share.
- If you sold the share before the end of the financial period, there is nothing to purify for that period.
The other method
Many screening services take a different route: they work out the percentage of the company's income that is impermissible and give away that percentage of each dividend received. Both methods try to remove the impure part of what you earned. The per-share method does not depend on whether a dividend was paid, which is why it suits growth stocks. The dividend method is simple to apply when you have dividend statements. If you follow a particular scholar, use the method they recommend.
Where to find the numbers
Interest income is on the income statement, often called interest income, finance income or non-operating interest income. Use the full figure, not the millions shown in a report's heading. Sanad fills it in from the latest statement and lets you edit it. This is an estimate, not a fatwa.