The real quality of a company’s earnings can only be revealed by identifying and eliminating any anomalies, accounting tricks or one-off events that distort the numbers.
Profit quality is the percentage of income that results from higher sales or lower costs.
An increase in net income without a corresponding increase in cash flow from operations is a wake-up call.
Tracking activities from the income statement to the balance sheet and cash flow statement is a good way to assess the quality of earnings.