Earlier article mentioned about cash flow statements are reliable whilst earnings can be manipulated by creative accounting/fraud.

This article deals with another aspect of earning which is the quality of earnings.

As investors or analysts the atttractives of an investment in a company is simply the quality of earnings.

Quality of earning really depends upon subjective/qualitative consideration rather than any arithmetic relationship.

Some factors to consider are:

• the quality of earnings can differ between a company with another. For example, a major property development company versus a just established Biotech company. Say they have large earnings reflected in their Income statement. However, upon further analysis, the major property development company has large sizable and sustainable land banks in good locations which can ensure recurring quality incomes whilst the Biotech company might have large income from one of the recent product discovery;

• the reliance that can be placed on the continuation of the stream of income;

• investors’ perceptions about the quality of the business’s managers;

• the range of products from which the income stream derives.

Interestingly, the abovementioned factors that affect the quality of earning can change.

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