What Are Quality of Earnings?

The quality of income refers to the reliability of the information related to the economic value of the enterprise expressed by accounting income. High-quality returns mean that the statement's returns are a reliable and trustworthy description of the company's past, present economic results, and future economic prospects. Conversely, if the return of the statement is misleading for the company's past, present economic results, and future economic prospects, then the return is considered low quality.

Yield quality

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Enterprise Assets

The quality of an enterprise's assets and the quality of its earnings affect each other. On the one hand, the quality of the company's assets will directly affect the quality of the company's income. On the other hand, low-quality income will also reduce the quality of assets that increase due to net income. The nature of the asset is "expected to bring future economic benefits to the enterprise". If an asset does not have this feature, then it is a

Analyze the company's audit report

The audit report is the conclusion drawn by a certified public accountant after an audit of a listed company. It is the only and fair evaluation that investors can obtain on the quality of corporate income. If the audit report contains unusual wording such as

Revenue quality analysis mainly includes analysis of net income operation index and cash operation index.

1. Analysis of Net Income Operation Index

Net income operating index refers to the ratio of net operating income to net profit. The lower the net income operating index, the smaller the proportion of recurring income, the less stable the profits, and the higher the potential investment risks, the more investors should carefully study when choosing.

2. Analysis of cash operation index

The cash operation index refers to the ratio of net operating cash flow to gross operating cash flow.

Calculation formula: cash operation index = net cash flow from operating activities ÷ cash generated from operations. In the formula: Operating cash is the sum of net operating income and non-cash expenses.

The cash operation index is an index that reflects the quality of cash recovery of an enterprise and measures cash risk. The ideal cash operation index should be 1. A cash operation index less than 1 reflects that part of the company's income is not cash, but stays in the form of physical or debt, and the risk of physical or debt assets is much greater than cash.

Issues that should be paid attention to when performing a revenue quality analysis:

The analysis of the quality of returns is a highly subjective activity. At present, there is no unified and quantifiable unified evaluation method. As a result, analysts with different risk appetites may draw different conclusions about the same company. Moreover, the analysis of income quality is only one of the factors to be considered in evaluating the overall investment quality of a listed company. Therefore, when making investment decisions, investors should combine the quality of returns with their own risk appetite and the overall environment of the enterprise in order to make appropriate decisions.