Earnings quality

What it means

The degree to which reported earnings are sustainable and backed by cash rather than by estimates and one-offs.

The exam angle

Standard flags: earnings persistently above cash flow, rising days sales outstanding, and repeated "non-recurring" charges.

Where it appears in the syllabus

• Financial Statement AnalysisCFA Level I · exam weight 11–14% · The three statements, inventories, long-lived assets, quality of earnings.
• Financial Statement AnalysisCFA Level II · exam weight 10–15% · Intercorporate investments, pensions, multinationals, report quality.

Related terms

• GoodwillThe excess of a purchase price over the fair value of the identifiable net assets acquired.
• Off-balance-sheet financingArrangements that give a company the use of an asset or the benefit of borrowing without showing the liability on its…
• Accrual accountingRecognising revenue when it is earned and expenses when they are incurred, regardless of when cash moves.
• Balance sheetA statement of what a company owns and owes at a single point in time.
• Book valueThe accounting value of equity: assets less liabilities as reported.
• Cash conversion cycleThe time between paying for inventory and collecting cash from the customer.