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Earnings Quality Score
Not all earnings are equal. Enter six numbers from any annual report — GAAP net income, adjusted net income, operating cash flow, DSO for two years, and whether the company had restructuring charges. Get a 0–100 earnings quality score across four dimensions, with plain-English interpretation for each. Works for any company, any country.
Enter financials
Profitability
Days Sales Outstanding
DSO = (Accounts Receivable ÷ Revenue) × 365
Charges
Earnings Quality Score
Enter financials to score earnings quality
Input values from any annual report. Four dimensions scored entirely in your browser — no signup, no API calls.
How to use this earnings quality scorer
Find the three profitability numbers
Open the annual report or earnings press release. Find GAAP net income (bottom of the income statement), adjusted or non-GAAP net income (from the reconciliation table in the earnings release), and operating cash flow (first section of the cash flow statement). Enter them in millions.
Calculate DSO for two years
Days Sales Outstanding = (Accounts Receivable ÷ Revenue) × 365. Find accounts receivable on the balance sheet and revenue on the income statement. Do this for both the current year and prior year. A rising DSO means revenue is being recognised faster than cash is being collected — a key quality signal.
Note restructuring charges
Check the income statement for restructuring, impairment, or special charges. Toggle Yes if any appear. The concern isn't one genuine restructuring — it's companies that report these charges every single year. Annual restructuring charges are effectively an operating cost the company chooses not to include in adjusted EPS.
Read the score and share
The tool calculates a 0–100 score across four dimensions (25 points each). Green means high quality. Yellow means mixed — investigate specific red dimensions before relying on reported EPS. Red means significant concern. Hit Share to save the URL — all your inputs are encoded in the link so you can return to it or send it to a colleague.
What each dimension measures
Cash conversion: earnings are an opinion, cash is a fact
Operating Cash Flow / GAAP Net Income is the most direct measure of whether reported profits are backed by real cash. Net income is constructed from accounting choices — depreciation rates, revenue recognition timing, warranty accruals, pension assumptions. Each is legitimate, but each creates room to manage the number. Cash flow doesn't: you either collected the cash or you didn't.
A ratio above 1.0 means the company generates more cash than it reports in profit — conservative accounting. Below 0.6 means most of the reported earnings are accrual-based and not yet collected. Negative operating cash flow with positive net income is one of the clearest red flags in financial analysis.
GAAP vs adjusted gap: what are they adjusting away?
Most companies now report two sets of earnings: GAAP (the legally required, audited number) and "adjusted" or "non-GAAP" (the management-preferred number with certain costs removed). Stock compensation, amortisation of acquired intangibles, and restructuring charges are the most common exclusions.
A small GAAP/adjusted gap (<5%) is routine and usually legitimate. A large gap (>25%) means management is excluding significant, recurring costs from the number it uses to communicate performance to investors. The acid test: would a private equity buyer accept these adjustments when valuing the company? If not, the adjusted number is misleading.
DSO trend: are they collecting what they're booking?
Days Sales Outstanding = (Accounts Receivable / Revenue) × 365. It measures how long, on average, a company waits to collect payment after booking revenue. A rising DSO means the company is recognising revenue faster than it's collecting cash — a classic signal of aggressive revenue recognition or loosening credit standards.
The trend matters more than the absolute level. An absolute DSO of 60 days is normal in some industries; a jump from 40 to 55 days in a single year is a signal worth investigating regardless of industry. Channel stuffing — shipping goods to distributors that haven't sold them — typically shows up as a sudden DSO spike before a revenue reversal.
Non-recurring charges: the ones that recur every year
One genuine restructuring charge — a factory closure, a major acquisition integration — is a legitimate event. The problem is companies that report restructuring, impairment, or "special" charges year after year, every year. At that point, the charge is no longer non-recurring: it's an operating cost the company has decided not to include in its adjusted earnings narrative.
Research has consistently shown that companies with recurring "non-recurring" charges see their adjusted EPS revert toward GAAP EPS over time, as analysts and investors ultimately demand accountability for the excluded costs. Treating these charges as permanent adjustments systematically overstates sustainable earnings power.
Why earnings quality predicts future returns
Richard Sloan's 1996 study found that investors systematically overprice high-accrual firms. The market fixates on EPS and fails to correctly value the cash vs. accrual split within that EPS. High-accrual firms mean-revert — the market eventually reprices as accruals unwind — producing returns roughly 10% below low-accrual firms annually. This Sloan Accrual Anomaly is one of the most robustly replicated findings in academic finance.
The same logic applies to GAAP/adjusted gaps: firms with persistently large gaps tend to see multiple compression as investors eventually price in the excluded costs. Earnings quality is a forward-looking signal, not just a backward-looking audit.
How to use earnings quality alongside valuation
Earnings quality is a filter, not a buy/sell signal. A low score means you should be sceptical of reported EPS — it doesn't automatically mean the stock is overvalued. A company with poor earnings quality might still be cheap on a P/FCF or EV/EBITDA basis if the market has already priced in the concerns.
Use the score to calibrate confidence in your valuation inputs. High earnings quality = apply multiples to reported EPS with confidence. Low earnings quality = anchor valuation to operating cash flow, not EPS. The lower the earnings quality, the wider the range of outcomes you should model.
Frequently asked questions
What is earnings quality?
Earnings quality measures how well reported net income reflects the real economic value generated by a business. High-quality earnings are backed by operating cash flow, conservative accounting, and genuine revenue. Low-quality earnings rely on aggressive adjustments, rising receivables, or recurring 'non-recurring' charges to report a better number than the business actually produced.
What cash conversion ratio is healthy?
Operating Cash Flow / GAAP Net Income above 1.0 is excellent — the company collects more cash than it reports as profit. 0.8–1.0 is healthy. Below 0.6 warrants investigation. Negative operating cash flow with positive net income is a major red flag, especially if persistent across multiple years.
How large a GAAP vs adjusted gap is acceptable?
A gap below 5% (adjusted earnings within 5% of GAAP) is immaterial. 5–10% is routine for companies with significant acquired intangibles or moderate stock comp. Above 20% means management is excluding very significant costs — dig into what they're adjusting away and ask whether those costs are genuinely non-recurring.
How do I calculate DSO?
DSO = (Accounts Receivable / Revenue) × 365. Accounts receivable is on the balance sheet. Revenue is at the top of the income statement. Calculate it for the current and prior year, then enter both values. The tool scores the change — a rising DSO (collecting more slowly) is a warning sign; a falling DSO (collecting faster) is a quality positive.
What counts as a restructuring charge?
Look for line items on the income statement labelled restructuring, impairment, special charges, transformation costs, integration costs, or similar. Also check the earnings press release — companies often 'adjust out' these items to reach their non-GAAP figure. If any such charges appear, toggle Yes.
Can a company have low earnings quality but still be a good investment?
Yes. A low earnings quality score means you should anchor valuation to cash flow rather than EPS — but the stock might still be cheap on a P/CFO or EV/EBITDA basis. Use earnings quality to calibrate confidence in your inputs, not as an automatic disqualifier.
Does this work for non-US companies?
Yes. This tool uses manually entered numbers rather than a ticker lookup, so it works for any company in any country. The inputs — net income, operating cash flow, accounts receivable, revenue — are standard disclosures in every annual report under any accounting framework (IFRS or US GAAP).
How do I share my results?
Click the Share button in the results panel. The tool encodes all your inputs into the URL and copies it to your clipboard. Anyone with the link can open it and see the same inputs and score — no account required.