PDSnet Glossary

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Definition

The quality of a company's earnings is a direct function of how sustainable they are. If the profits of a company rise every year by 15% and have done so for many years then analysts and investors will say that their earnings are of good quality. But if the earnings are primarily due to a once-off event (like a tax break or a profit on the sale of an asset) which is unlikely to be repeated next year, then the earnings are said to be of poor quality. Sustainability of earnings is very often a function of the business which a company is in. If the bulk of its income is derived from a large group of debit orders (such as with DSTV) then the earnings are likely to be good quality. A company in the chicken industry, which is very capital intensive, very competitive, requires considerable working capital, is dependent on a large labour force and subject to catastrophes such as an outbreak of Newcastle disease, is said to have poor quality earnings.

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