Startup & fundraising
Quality of Earnings
Formula reviewed by Tahir Asif, CMA
A buyer’s review of a company’s reported earnings to test whether they are accurate, recurring and convertible to cash.
A quality-of-earnings review, often done by an accounting firm during due diligence, tests the seller’s reported and adjusted EBITDA. It checks that revenue is recognized properly, that adjustments are supported by documents, that one-time items are truly one-time, and that earnings turn into cash after capital spending and working capital.
The result is often a lower, more defensible earnings figure. Because a purchase price is a multiple of that figure, each dollar of adjustment rejected reduces the price by the multiple.
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