A company’s quality of earnings (“QOE”) can be determined a number of ways, but ultimately it is obtained through analysis of actual operating cash flow. Often this analysis leads to sales and profit margins differ from internal financial statements and/or company tax returns.
To arrive at a true representation of operating sales and related expenses we begin analysis with a high-level, key management and accounting staff interview in order to get a sense of day-to-day financial entry logistics, check and balances in place, and leadership style overall.
In general, earnings that are calculated conservatively are considered more reliable than those calculated by aggressive tax mitigating accounting policies. Quality of earnings can be obscured by accounting practices that hide poor sales or increased business risk.
If a company adheres to generally accepted accounting principles (GAAP) and / or has audited financial records it is likely that the quality of earnings is better presented and of higher quality as compared to a company who does not as stringently adhere to accounting principles.
Our team of experts work with the clients to provide a quality of earnings report is often an invaluable step in the acquisition and / or restructuring process.