Quality Of Earnings

What is 'Quality Of Earnings'

The quality of earnings refers to the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory.

BREAKING DOWN 'Quality Of Earnings'

Quality of earnings is considered poor during times of high inflation. Also, earnings that are calculated conservatively are considered to have higher quality than those calculated by aggressive accounting policies.

RELATED TERMS
  1. Accounting Earnings

    The amount of money a company has earned during a given period, ...
  2. Quality Management

    The act of overseeing all activities and tasks needed to maintain ...
  3. Ending Inventory

    The value of goods available for sale at the end of the accounting ...
  4. Average Inventory

    A calculation comparing the value or number of a particular good ...
  5. Inventory Reserve

    An accounting entry that represents a deduction from earnings ...
  6. Quality Control

    A process through which a business seeks to ensure that product ...
Related Articles
  1. Markets

    Earnings Quality: Conclusion

    By Tim Keefe,CFA (Contact Author | Biography)A firm's reported earnings number has typically been the focus of Wall Street, Main Street and the media. Other aspects of financial statements get ...
  2. Markets

    Earnings Quality: Understanding Accounting Standards

    By Tim Keefe,CFA (Contact Author | Biography)The anecdote in the introduction does not portray the accounting situation with complete accuracy; there are rules that management must use when reporting ...
  3. Investing Basics

    Seven Market Anomalies Investors Should Know

    Though they're unpredictable and heavily contested, market anomalies can often work in an investor's favor.
  4. Economics

    What's Involved in Quality Management?

    Essentially, quality management entails overseeing all activities and tasks needed to maintain excellence.
  5. Investing Basics

    Rising Prices: Inflation or Quality Improvements?

    Price indices are used to measure inflation, but qualitative improvements in products complicates attempts to isolate the true cause of rising prices.
  6. Fundamental Analysis

    Earnings Quality, the Facebook Example

    When judging Facebook's quality of earnings it is important to understand the various sources of revenue and trends in those sources.
  7. Economics

    What are Earnings?

    The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year.
  8. Fundamental Analysis

    The Financial Characteristics Of A Successful Company

    There are many factors that contribute to a profitable business. Find out what they are here.
  9. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  10. Investing

    Days Sales of Inventory

    Days Sales of Inventory, also called Days Inventory Outstanding, is a key financial measurement of a company's performance pertaining to inventory management. In simple terms, it tells how many ...
RELATED FAQS
  1. Why are P/E ratios generally higher during times of low inflation?

    Inflation affects equity prices in several ways. Most importantly, investors are willing to pay less for a certain level ... Read Answer >>
  2. What is earnings management?

    Before diving into what earnings management is, it is important to have a solid understanding of what we mean when we refer ... Read Answer >>
  3. What is the formula for calculating inventory turnover?

    Learn about the inventory turnover ratio, how it is calculated and what this efficiency metric tells businesses about their ... Read Answer >>
  4. How do you analyze inventory on the balance sheet?

    Learn how to analyze inventory using financial statements and footnotes by doing ratio analysis and performing qualitative ... Read Answer >>
  5. How rapidly can expanding sales reduce a firm's earnings?

    In order to operate and make money, a company must spend money. Revenue - the dollar amount of sales - can be seen on a company's ... Read Answer >>
  6. Why should investors care about the Days Sales of Inventory (DSI)?

    Learn about days sales of inventory and what it measures; understand why an investor would want to know a company's days ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center