Quality of Earnings | Definition | Metrics - YouTube

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clicking the bell ican today we have a topic with honest quality of earnings

well quality of earnings is very important because all the investors they

try and analyze the company's quality earning how far they are with the

expectations and based on which the market numbers move over here the there

is an example company that has been taken but the most important part is you

know the segregation of the data here or the amount of revenue which is coming

from different end and how they are important well we'll try and analyze

everything in detail format first we will learn is what is quality of

earnings now the quality of the earning refers to the income generated from the

core operations that is recurring the business and it does not include the one

of revenues that is the non recurring part generated from the other sources so

quality of earning report is primarily used to assess the accuracy and

sustainability of the historical earning as well as the archability of the future

projection so evaluating the quality earning will help the financial

statement user make judgment about the certainty of certain income and the

prospects of the future so in case of the acquisition valuations are typically

based on multiple like EBITDA it is therefore critical for the buyer to

understand the historical earnings their trends key assumptions used for the

focus and sustainability of the earnings so in order to earning in order for an

earning measure to be considered a very high quality it must reflect the cash

flow and it must be sustainable so earning that are tied in account

receivable for example do not have much money because despite being recognized

they have not yet been realized similarly you know the earnings that are

not sustainable you don't understand expenses due to

unfilled executive positions as an example would overstate your earnings

will take any the next topic as the example the point of discussion as the example

part let's say there is a company called ABC and it has the net income that is

increased by 130% so it's its sales has jumped let's say

200% this is the net income part this is the sales part while you

know it managed to bring down its general minute administrative cost close

to 10% this is your G and a and on the contrary say that you know the

company speak your sales for more as flat so it expense rose only by 5%

okay and its net income increased by a 130% this is for the PQR

are limited okay so after change know the way some of the assets in inventory

depreciated so looking at the above earning quality example it is prudent to

say that Dino company ABC has better earning as you can see quality as

compared to XYZ or peak you are because you know the company ABC earnings are

from genuine improvement Nicole operations of the company and that is

the sales products and company PQR have was able to record a similar rise in the

net income mainly as a result of the accounting changes and changes in the

depreciation and the earning increases are little more than the paper profits

so it is important to note that Company PQR hasn't done anything illegal or

wrong but it is but its quality of the earning is lower than that of ABC now

there are some factors affecting the quality of the earnings so what are the

factors he according to the survey that was conducted by amore university ninety

94.7% of the CFO's think that the earnings are either very

important or somewhat important for the burst rate violently coming so it is

difficult to define the quality of the audio and although there are no defined

criteria to be considered so taken as a whole it can be summarized as a degree

to which the earnings are either cash or non-cash recurring or non recurring and

based on the sighs measurement or estimate that are

subject to change now if a company has managed to increase its earning every

year by improving the cost of efficiency or let's say the sales under debt from

the marketing company that company would have a very high quality of its earning

and if any company's earnings are linked to the outside sources such as

increasing common prices then the company would be seen having a

low-quality earning right so also company may report growth in sales but

this may be due to the growth of the credit sales right usually analysts are

found are not fond of losing credit policies or prefer organic growth in

sales so a company may have a high in net income but at the same time negative

cash flows on the operation this can be done through the artificial means now

there are some means or the indicators of overall earning quality the financial

statement can provide a very few indicators that readers can use to

assess the owning of the high level this are it is not limited to but you can do

that it's Y to Y that is Year to Year or Q to Q that is quarter to

quarter a consistency of the accounting policies second the overall degree of

the estimation or the substituted determinate determination of the

earnings then the trends in the reserve balances then the transparency the most

the most important in the disclosure discussion of a need

non-recurring or unusual transaction sixth is the presence of the pro forma

measure of the earnings seventh is you know disclosure of the related party

transactions it is the ratio of the net income to cash flow operations now

what are the measures that can be used measures for quality of earnings now it

should be noted that companies may manipulate earning measures such as like

you know EPS or price to earnings ratio the p/e ratio by you know buying back

the shares which reduces the number of the shares outstanding and due to this a

company with a declining net income we will do may be able to post the EPS

growth so because the earnings go up the p/e ratio goes down well and signaling

that the stock is undervalued or on the sale in actuality the company simply

repurchase the share and it is particularly concerned with when when

companies take the additional debt to finance their stock purchase so let me

get to my conclusion part well there is no signal characteristics to measure the

quality of earnings however you know the financial statement users especially the

audit committees the management and should be prudent in evaluating the

quality of differential reporting so certainly indicators and characteristics

should be focused and assess the quality of honey so that's it for this

particular topic so that's it for this particular topic if you have learned and

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