Quality of Earning Reports

While the terms ‘quality of earnings’ and ‘earnings quality’ have no agreed-upon meaning, both terms are used to address the business cycle stage, timing of transactions, earnings management, and other issues. Herbein prepares Quality of Earnings (Q of E) reports to assist buyers, sellers and financial institutions involved with a transaction evaluate the financial strength and stability of the target company, identify risks related to the subject transaction and establish the adjusted benefit stream and working capital targets that will form the basis for the transaction.

Effective Quality of Earnings reports will also identify and document adjustments to the target company’s historical financial information in order to arrive at an estimate of “economic reality”. Such considerations may include:

  • Owner ‘add-backs’
  • Owner compensation
  • One-time sales that may skew past results
  • Variations between book and tax earnings
  • Inventory quality and/or inventory sell-offs
  • Post-transaction synergistic adjustments

While every company is unique, Herbein’s Q of E reports are able to normalize performance metrics to help investors make the best decisions possible.