What is Quality of Earnings?
How Does Quality of Earnings Work?
Now let's say that Company ABC's sales stay flat, its expenses rise only slightly and its net income increases by 140% because it changed the way it depreciated some of its assets and inventory.
Most analysts say that Company XYZ has better quality than Company ABC because Company XYZ's are from genuine improvements in core operations -- the sale of products. Company ABC's net income rose by just as much, but because it was the result of changes, the increases are little more than paper profits. Company ABC hasn't done anything illegal or wrong, but its quality of is lower than Company XYZ's.
Why Does Quality of Earnings Matter?
stock price increase is here to stay, many and investors look to quality. A company that is genuinely doing well show increases in sales and steady changes in expenses rather than rely on changes to artificially pump things up. Regardless, the temptation to rely on methods to improve is widespread and is especially strong for companies that have cyclical sales and profits.prices rise and fall on , and so in order to determine whether a