Module I· Earnings Quality & Red FlagsBasic
Question
What is earnings quality, and why is it important for IB?
Answer
Earnings quality
The extent to which reported earnings reflect sustainable, recurring cash-generating performance.
High-quality earnings
- recurring revenue
- strong cash conversion
- limited one-offs
- conservative accounting
- clean working capital
- low customer / supplier concentration risk
Why IB cares
Valuation multiples apply to maintainable earnings, not accounting noise. QoE findings directly affect adjusted EBITDA, purchase price, debt capacity, covenant headroom, and SPA protections.