Fundamental Glossary / Earnings & Accounting Concepts
Earnings Quality
How repeatable, collectible, and conservative the reported profit is.
Formula
Judged from cash conversion, the size of accruals, the recurrence of one-time items, accounting-policy choices, and the auditor's opinion. Not a single formula.
What it means
High-quality earnings come from selling the product, collecting the cash, and using conservative estimates. Low-quality earnings come from accruals, gains, and policy changes.
Quality is why two companies with the same EPS can deserve different multiples.
How to read it
A practical test: over five years, did operating cash flow roughly add up to operating profit, and did free cash flow fund the dividend. If yes, quality has been adequate. If no, ask where the earnings went.
What to watch
Smooth earnings are not automatically high quality. A business that never has a weak quarter may be smoothing reserves. Some volatility, honestly reported, is a better sign than a perfect line.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.