Wize University Introduction to Financial Accounting Textbook > The Cash Flow Statement
Quality of Earnings Ratio
Popular Courses
COMM 217
Concordia University
ACCT 2301
The University of Texas at Dallas
Intro to Financial Accounting
General Course
COMM 293
University of British Columbia
Intro to Financial Accounting
University Study Guides
MGCR 211
McGill University
ACCT 1220
University of Guelph
Intro to Financial Accounting
University Study Guides
ACCT 217
University of Calgary
ADMS 2500
York University
ACCTG 211
University of Alberta
COMM 111
Queen's University
ADM 1340
University of Ottawa
BU127
Wilfrid Laurier University
ACCT 2301
Houston
ACCT 2301
Houston
COMM 1101
Dalhousie University
AFM 101
University of Waterloo
AFA 100
Toronto Metropolitan University
BUSINESS 3321K
Western University
0:00 / 0:00
Quality of Earnings Ratio
This quality of earnings ratio is a profitability ratio that measures if a company's profits are high quality. High quality earnings are earnings generated from the companies main business and can be repeated year-after-year.
Interpreting the ratio
- Ratio > 1: The company's generating more high quality income.
- Cash from operating activities is greater than then income.
- Net income is likely coming from the main operations of the business.
- High quality income can be repeated year over year.
- Ratio < 1: The company's generating more low quality income.
- Net income is greater than cash from operating activities.
- The company might be using accounting techniques to inflation net income.
- Low quality income cannot be repeated year over year.
0:00 / 0:00
Example: Quality of Earnings Ratio
Compute the quality of earnings ratio for Apple, Inc. for the year ended September 28th, 2019.
Practice: Quality of Earnings Ratio
Calculate and interpret the company's quality of earnings ratio for the year ended May 31, 2020.
Quality of earnings ratio.
Do not round your work, round final answer to 2 decimal places.