Whether you need sell-side or buy-side representation, our expertise ensures that our Quality of Earnings reports go beyond the traditional assessment of the sustainability and accuracy of historical earnings and achievability of future projections.
How do we best focus on “quality” in quality of earnings reports?
Quality Issue #1: What Drives EBITDA?
Examine the key value drivers of sales growth and profit margins to determine what really drives and impedes EBITDA. Understanding these and any other value drivers requires an in-depth analysis of their contributing elements. This can be illustrated using a generic products company.
Quality Issue #2: Test the Business Plan Assumptions
Test the earnings sensitivity to changes in operating and financial parameters. Testing needs to reflect:
- Key metrics that drive growth and profitability
- Cyclicality of sale and inventory
buildup - Working capital needs
- Capital requirements
- Tax assumptions
- Returns to shareholders
Quality Issue #3: Balance Sheet Review for Potential Effects on Profits
Review the balance sheet for anything relevant in understanding the company’s past and future performance. Such as:
- Atypical working capital
- Inventory turn and obsolescence
- Receivables issues
- Vendor payables and accruals
Quality Issue #4: Funding Capacity, Leverage, and Financial Structure
Review the business’ funding capital structure, return on debt and equity, and income taxes. The following areas must be examined:
- Cash reserves and borrowing facilities
- Borrowing costs
- Debt service and covenants
- Cyclical funding needs
- Financial leverage risk
- Taxation
- Returns to shareholders
For more information about how we can be of assistance, please contact one of the professionals listed below.
