A quality of earnings reports assesses a company’s true financial performance and sustainability by analyzing key factors. The purpose is to provide an unbiased evaluation of financial operations. It provides an in-depth evaluation of revenue quality, expense consistency, and potential adjustments, offering clear insights for investors and stakeholders. The emphasis of this report is on earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a strong performance indicator of a company’s cash flow-generating abilities.
The quality of earnings report is usually prepared by an external valuation firm and helps assess a Company’s financial information to determine the accuracy of earnings. It represents an objective financial portrait of a Company by adjusting key facturs such as non-recurring revenue, discretionary expenses, accounting policy adjustments, customer wins/losses and other adjustments. It is not an audit and is typically used during M&A transactions and focuses on things such as:
- Revenue sources
- Discretionary expenses
- Customer concentrations
- Non-recurring transactions
Evaluating all of these factors allows us to arrive at an adjusted EBITDA that truly represents the financial health of a Company.
