What factors influence earnings quality?

Factors like revenue and expense recognition policies, accounting methods, and assumptions influence earnings quality. Indicators such as consistency, cash flow trends, and alignment of net income with cash flows provide insights. Red flags, including aggressive revenue recognition and one-time gains, should be scrutinized.

How does a company's operating cash flow affect its earnings quality?

Such consistency suggests that the company isn't relying on one-off events or irregularities to boost its profits but is generating genuine growth from its operations. When net income and operating cash flows move in tandem, it's a positive indicator of earnings quality.

How does revenue affect earnings quality?

The manner in which a company recognizes revenue can greatly influence its earnings quality. Some companies might recognize revenue as soon as an order is placed, while others may wait until the cash payment is received.