“Quality of Earnings or (“Q of E”) is an assessment of a company’s earnings that removes distortions introduced by accounting methods to more accurately reflect its operational efficiency.” – Investopedia

What is a Q of E

A quality of earnings report is a financial analysis that evaluates the quality and sustainability of a company’s earnings. The report assesses factors such as revenue and cost structure, accounting policies, and the quality of a company’s assets and liabilities, in order to determine the long-term potential of a company’s earnings. The report provides insights into a company’s financial performance, helping investors, analysts, and stakeholders understand the underlying drivers of a company’s earnings.

Who does them?

Quality of earnings reports are typically prepared by financial analysts, investment bankers, accountants, or consultants. They may be commissioned by investors, lenders, or other stakeholders who are interested in evaluating the financial health and performance of a company. The report is based on an examination of a company’s financial statements, as well as other financial and operational information that is publicly available or provided by the company. The objective of a quality of earnings report is to provide an independent and impartial assessment of a company’s earnings, which can help inform investment decisions and provide a basis for negotiating transactions such as mergers, acquisitions, or financing arrangements.

How much do they cost?

The cost of a quality of earnings report can vary widely depending on the scope of the analysis, the size and complexity of the company being evaluated, and the level of expertise of the individual or firm preparing the report.

In general, a quality of earnings report can cost anywhere from a few thousand dollars for a basic analysis of a small company, to tens of thousands of dollars for a comprehensive analysis of a large, complex company. The cost will also depend on the level of detail required, the amount of research and analysis that needs to be done, and the specific needs and requirements of the client.

It’s important to keep in mind that the cost of a quality of earnings report can be a worthwhile investment, especially for potential investors or lenders who want to make informed decisions about a company’s financial health and performance. A thorough quality of earnings report can provide valuable insights and help mitigate risks, making it a valuable tool for decision-making.

Does it come with a working financial model?

Most do not. Weekly Accounting’s QBO Quality of Earnings report includes building a weekly data warehouse for all the business data.

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Example: Statement of Work for Quality of Earnings Report

Introduction:The purpose of this statement of work is to outline the scope and objectives of a quality of earnings report for [Company Name]. The report will provide an in-depth analysis of the company’s earnings, revenue and cost structure, accounting policies, and the quality of its assets and liabilities, with the aim of determining the long-term potential of its earnings. The report will be used by [Client Name] to inform investment decisions and provide a basis for negotiating transactions such as mergers, acquisitions, or financing arrangements.

Objectives:

• To perform a comprehensive analysis of the company’s financial statements and other financial and operational information, in order to determine the quality and sustainability of its earnings.
• To assess the revenue and cost structure of the company, and identify any trends or anomalies that may impact its financial performance.
• To evaluate the quality of the company’s assets and liabilities, and assess the potential for any hidden risks or liabilities that may impact its earnings.
• To analyze the company’s accounting policies and practices, and determine their impact on the financial statements.
• To provide a comprehensive report that summarizes the findings of the analysis, and provides insights into the company’s financial performance and earnings potential.

Scope of Work:

• Collection of financial and operational data from [Company Name] and relevant public sources.
• Analysis of the company’s financial statements, including its balance sheet, income statement, and cash flow statement.
• Evaluation of the company’s revenue and cost structure, including analysis of its gross margins, operating expenses, and other key financial metrics.
• Analysis of the quality of the company’s assets and liabilities, including assessments of its accounts receivable and accounts payable.
• Review of the company’s accounting policies and practices, including its methods for recognizing revenue and its treatment of accruals and reserves.
• Preparation of a comprehensive report that summarizes the findings of the analysis and provides recommendations for further action.

Deliverables:

• A final report that includes an executive summary, methodology, and detailed analysis of the company’s earnings, revenue and cost structure, accounting policies, and the quality of its assets and liabilities.
• A working financial model that provides projections of the company’s future earnings, based on its historical performance and other relevant factors (optional).
• A presentation of the findings to [Client Name], which will include a review of the key findings and recommendations.

Timeline:The quality of earnings report will be completed within [number of weeks or months] from the start of the engagement. The final report and presentation will be delivered to [Client Name] on [date].

Note: This statement of work is intended as a general guide and can be customized based on the specific needs and requirements of the client.

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