Earnings quality
Definition · Level 10 · Valuation
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How closely reported profit turns into cash. Profit that keeps outrunning operating cash flow, for example because receivables and inventory grow faster than sales, is a warning sign.
Example
Net income +25% but cash from operations −10%: weak earnings quality.
Where Tradecraft teaches it
Level 10 · Valuation, in the lesson “Cash flow: why profit isn’t cash”: Accruals versus cash, the three cash-flow sections, free cash flow, and how the three statements link.
Related terms
- Accrual accountingRecording revenue when earned and costs when incurred, whatever the date cash changes hands.
- CapexCapital expenditures: cash spent on long-lived assets such as plants, equipment and servers.
- Cash-flow statementReport of the cash that actually moved in and out over a period, in three sections (operating, investing, financing) whose sum, plus any currency…
- CFI vs CFFInvesting cash flow (capex, acquisitions, securities bought and sold) versus financing cash flow (debt issued or repaid, shares issued, buybacks…
- CFOCash flow from operations: under the indirect method, net income plus non-cash charges (depreciation and amortization, stock compensation), adjusted…
- Free cash flowOperating cash flow minus capital expenditures (the common definition; some analysts also deduct lease payments or stock compensation): cash that…