Quality of Earnings

Quality of earnings

Increased earnings due to increased sales and cost controls, as compared to artificial profits created by inflation of inventory or other asset prices.

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quality of earnings

See earnings quality.

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Quality of Earnings

A condition describing how earnings are recognized. Earnings of high quality are attributable to conservative accounting standards and/or strong cash flows. Low quality earnings come from artificial sources, such as inflation or aggressive accounting. For example, in the early 2000s, Krispy Kreme doughnuts had strong earnings and consequently a high stock price. However, the company had low cash flow from operations and the strong earnings came mainly from the accounting structures it used. Therefore, its stock was overvalued. Quality of earnings ratings are subjective, but they take into account matters such as corporate governance, inventory-to-sales ratios, and other factors.