Quality of Earnings
10 Core Principles for Fiscal Investors
Earnings season rewards clarity—and punishes shortcuts.
Headline EPS tells you what happened. Quality-of-earnings analysis explains why it happened—and whether it’s repeatable.
10 Core Principles
Use this as a quick checklist when a company “beats” but the stock still sells off.
Look Beyond the Headline EPS
Reported EPS is the starting point. Always assess how earnings were generated—not just whether they beat estimates.
Cash Flow Is the Ultimate Reality Check
Earnings can be managed. Cash flow is harder to fake—and reveals the true health of the business.
Watch for Accounting Red Flags
Be cautious with frequent write-downs, aggressive revenue recognition, or balance-sheet “creativity.” These often precede disappointments.
Inventory Can Distort Results
Rising inventories or LIFO/FIFO changes can mask slowing demand, margin pressure, and operational inefficiency.
“Non-Recurring” Often Means Recurring
If “one-time” charges show up repeatedly, they’re part of normal operations—and should be treated as such.
Separate Substance From Storytelling
Strong companies let results speak. Overly promotional language can signal weak fundamentals.
Consistency Builds Credibility
Frequent accounting-policy changes reduce transparency and increase risk. Every change deserves scrutiny.
Always Read the Footnotes
Key assumptions, risks, and adjustments are often disclosed—but not emphasized. The footnotes tell the real story.
Compare Earnings to Peers
Outlier margins or growth rates relative to competitors demand explanation. Peer analysis exposes distortions fast.
Quality Earnings Are Sustainable Earnings
The strongest businesses generate earnings that are repeatable, cash-backed, and transparent. That’s where long-term compounding begins.