A Quality of Earnings (QoE) analysis is an important piece of any business acquisition.
It involves a detailed review of a company's financials aimed at understanding the sustainability of its earnings and the quality of its cash flow.
To better understand what a QoE is, here are 3 things it is not:
1) It is not a projection: A QoE focuses on past performance, providing insights into a company’s true financial health.
While projections might be reviewed to challenge their assumptions, creating forecasts or projections is outside the typical scope.
2) It is not an audit: Audits verify that financial statements comply with standards like GAAP, while a QoE digs deeper into cash flow quality and recurring earnings.
A QoE is a consulting service, often customized, and while it may rely on audited figures, it focuses more on cash flow and earnings sustainability.
3) It is not a valuation or recommendation: A QoE analyzes the financials but does not determine the company’s value or make buy/sell recommendations.
It presents facts, leaving investors or buyers to draw their own conclusions. However, your QoE provider can often offer informal advice based on experience.
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