Quality of Earnings Ratio Calculator

Quality of Earnings Ratio Calculator helps investors determine how much of a company's reported earnings are sustainable and reflect actual operating performance. A higher ratio indicates more reliable earnings.

Input Parameters

Calculation Results

Quality of Earnings Ratio

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Where:
Quality of Earnings Ratio = Operating Income / EBIT
A ratio greater than 1 indicates earnings are of high quality
A ratio less than 1 suggests some earnings may be non-recurring or non-operating

Interpretation

Enter values to see interpretation

Quality of Earnings Ratio Calculator Usage Guide

Learn how to use the Quality of Earnings Ratio Calculator and its working principles

What is the Quality of Earnings Ratio?

The Quality of Earnings Ratio (also known as the Earnings Quality Ratio) is a financial metric that measures the proportion of a company's reported earnings that come from operating activities versus non-operating or non-recurring items. It helps investors assess how much of a company's earnings are sustainable and reflect the true performance of its core business operations.

How to Use This Calculator

  1. Enter the company's Operating Income (income from regular business operations)
  2. Enter the company's Earnings Before Interest and Taxes (EBIT)
  3. Click the "Calculate" button to compute the Quality of Earnings Ratio
  4. Review the result and interpretation to evaluate the quality of the company's earnings

Interpreting the Results

  • Ratio > 1.0: Indicates high-quality earnings. Most of the company's reported earnings come from operating activities and are sustainable.
  • Ratio = 1.0: Indicates all reported earnings are from operating activities.
  • Ratio < 1.0: Indicates some portion of the company's earnings may be non-recurring or non-operating, suggesting potential earnings manipulation or lower quality earnings.

Example

For a company with $500,000 in Operating Income and $750,000 in EBIT, the Quality of Earnings Ratio would be 500,000 / 750,000 = 0.67. This suggests that 33% of the reported earnings may be non-operating or non-recurring.

Limitations

While useful, the Quality of Earnings Ratio has limitations. It doesn't account for accounting changes, quality of assets, or cash flow quality. It should be used in conjunction with other financial metrics for a comprehensive analysis.