Quality of Earnings (QoE)
A financial due diligence analysis assessing the sustainability and accuracy of a company's reported earnings.
Full Definition
A Quality of Earnings (QoE) report is a detailed financial analysis performed during due diligence to assess whether a target company's reported earnings accurately reflect its sustainable profitability.
QoE analysis typically covers:
- Revenue recognition and quality
- Gross margin analysis
- Normalisation adjustments review
- EBITDA sustainability
- Working capital analysis
- Net debt and debt-like items
- Historical trends and seasonality
- Pro forma adjustments
- Management case review
Key areas of focus: Revenue quality:
- Recurring vs one-off revenue
- Customer concentration
- Contract terms and renewals
- Pipeline and backlog
Earnings quality:
- Normalisation adjustment validity
- Accounting policy appropriateness
- Cost structure sustainability
- Related party transactions
Who prepares QoE:
- Usually commissioned by buyer
- Prepared by accounting firms
- Vendor QoE increasingly common (seller commissions)
Value of QoE:
- Validates or challenges management's numbers
- Identifies risks and adjustments
- Supports price negotiation
- Informs debt financing decisions
- Reduces post-completion disputes
A thorough QoE report is essential for significant transactions and is typically required by lenders providing acquisition financing.
Related Terms
Normalised Earnings
Adjusted profit figures removing one-off, non-recurring, or owner-specific items to show sustainable profitability.
EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortisation – a key profitability metric used in valuations.
Due Diligence
The comprehensive investigation and analysis of a target business before completing an acquisition.
Working Capital
The operating liquidity of a business, typically calculated as current assets minus current liabilities.