Finance: What is Earnings Quality?

What is Earnings Quality? Earnings quality refers to a company’s tangible earnings from sales or reduced expenses as a result of management decisions and policies, as opposed to accounting manipulation devices, such as virtually inflating or reducing a standing inventory into a different accounting quarter or year end report for tax reporting or other reasons.

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Transcript

00:19

yes but rather there are different qualities of earnings What

00:23

if we told you that one hundred percent of whatever

00:25

dot coms earnings came from Adsit sold tto forty thousand

00:29

different buyers because its website was just that popular All

00:33

of the growth came intrinsically meaning that users just loved

00:37

using the site and nothing meaningful changed on their balance

00:40

sheet or wall street Fancy engineers doing creative clever things

00:44

with the selling of money Other than that the cash

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account went up because dead profits and they kept him

00:50

okay Those air very high quality earnings Really sure about

00:54

that C we threw a curveball in there We do

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that all the time All right Well what if we

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told you that seventy percent of their ad sales came

01:01

from a subsidiary in china and were all collected in

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our m b the chinese currency and that in this

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quarter well that the chinese currency appreciated thirty eight percent

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relative to the dollar Well essentially all of their big

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growth The big growth that we thought was such high

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quality earnings came because the chinese currency did well not

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because their business did all that well so wait Had

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the chinese currency just been flat the company wouldn't have

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earned anything close to a dollar thirty to seventy percent

01:33

of the sales and almost forty percent of currency gain

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there Well it means that the company happened to have

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a lot of sails in a country with a fast

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appreciating currency It wasn't necessarily a direct reflection that the

01:46

company was doing so well and had such high quality

01:49

earnings Yeah it's great that they were in a hot

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market and highly appreciating currency but if the currency hadn't

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gone up so much relative to the u s dollar

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in which they report their earnings toe wall street while

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the real urn things end of the company would have

02:01

been more like a dollar maybe less so that it

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be low quality earnings What about high quality earnings Well

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really simply you said you'd sell three hundred tractors this

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quarter the street thought you'd sell three hundred ten You

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actually sold three hundred twenty you said margins would be

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twenty percent The street thought they'd be twenty two percent

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and they actually were twenty five percent You said you

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generate twenty million dollars in cash the street thought you

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generate twenty two and you actually did generate twenty five

02:32

million dollars in cash High quality financial results Simple You

02:36

just did your core business Selling tractors well Quality earnings 00:02:41.233 --> [endTime] quality tractors