Earnings Quality

Finance allah shmoop What is earnings quality Well it's just

math right Whatever Dot com just produced a dollar thirty

two in earnings One hundred thirty two cents of wall

street Love and profit How can there be a quality

to that number The number is a number right Well

yes but rather there are different qualities of earnings What

if we told you that one hundred percent of whatever

dot coms earnings came from Adsit sold tto forty thousand

different buyers because its website was just that popular All

of the growth came intrinsically meaning that users just loved

using the site and nothing meaningful changed on their balance

sheet or wall street Fancy engineers doing creative clever things

with the selling of money Other than that the cash

account went up because dead profits and they kept him

okay Those air very high quality earnings Really sure about

that C we threw a curveball in there We do

that all the time All right Well what if we

told you that seventy percent of their ad sales came

from a subsidiary in china and were all collected in

our m b the chinese currency and that in this

quarter well that the chinese currency appreciated thirty eight percent

relative to the dollar Well essentially all of their big

growth The big growth that we thought was such high

quality earnings came because the chinese currency did well not

because their business did all that well so wait Had

the chinese currency just been flat the company wouldn't have

earned anything close to a dollar thirty to seventy percent

of the sales and almost forty percent of currency gain

there Well it means that the company happened to have

a lot of sails in a country with a fast

appreciating currency It wasn't necessarily a direct reflection that the

company was doing so well and had such high quality

earnings Yeah it's great that they were in a hot

market and highly appreciating currency but if the currency hadn't

gone up so much relative to the u s dollar

in which they report their earnings toe wall street while

the real urn things end of the company would have

been more like a dollar maybe less so that it

be low quality earnings What about high quality earnings Well

really simply you said you'd sell three hundred tractors this

quarter the street thought you'd sell three hundred ten You

actually sold three hundred twenty you said margins would be

twenty percent The street thought they'd be twenty two percent

and they actually were twenty five percent You said you

generate twenty million dollars in cash the street thought you

generate twenty two and you actually did generate twenty five

million dollars in cash High quality financial results Simple You

just did your core business Selling tractors well Quality earnings 00:02:41.233 --> [endTime] quality tractors