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Earnings Quality Score
Score accounting quality and earnings integrity for any stock or compare two tickers side by side. Five SEC dimensions, shareable URL. Free, no signup.
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.
What an earnings quality score measures and why it matters
An earnings quality score tells you whether a company's reported profits reflect real economic performance — or whether accounting choices are flattering the numbers. Two companies can both report $5 earnings per share, but if one converts 95% of that to operating cash flow while the other converts only 40%, they are not equally profitable. The first company earned cash; the second earned an accounting opinion.
This matters because low-quality earnings tend to mean-revert. A company reporting strong GAAP earnings but weak cash flow conversion scores poorly because the gap between accruals and cash is unsustainable — eventually, uncollected receivables become write-offs, aggressive revenue recognition gets restated, and recurring “non-recurring” charges erode the adjusted narrative. Richard Sloan's accrual anomaly research showed that high-accrual firms underperform low-accrual firms by roughly 10% annually as this reversion plays out.
How to use this earnings quality scorer
Find the three profitability numbers
Open the annual report or earnings press release. Find GAAP net income, adjusted or non-GAAP net income, and operating cash flow. Enter them in millions.
Calculate DSO for two years
Days Sales Outstanding = (Accounts Receivable ÷ Revenue) × 365. Do this for both the current year and prior year. A rising DSO means revenue is being recognised faster than cash is being collected.
Note restructuring charges
Check the income statement for restructuring, impairment, or special charges. Toggle Yes if any appear. Companies that report these charges every year are effectively treating them as an operating cost.
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. Red means significant concern. Hit Share to save the URL.
Understanding your earnings quality score
What Is Earnings Quality?
Earnings quality measures the degree to which reported net income reflects true economic performance. High-quality earnings are backed by operating cash flow, recurring by nature, and not inflated by one-time accounting benefits. Low-quality earnings show the opposite: a widening gap between net income and cash flow, growing accrual balances, and aggressive revenue recognition that books sales before cash arrives.
How the Score Is Calculated
The scorer evaluates five dimensions, each worth 0–20 points for a 100-point total. FCF/Net Income ratio measures how much of reported profit converts to free cash flow. Accruals ratio quantifies the portion of earnings driven by accounting entries rather than collected cash. Gross margin stability signals pricing power durability.
What Makes a High-Quality Earnings Report
A score of 75 or above indicates cash-backed earnings with consistent margins and low accrual ratios. Scores between 50 and 74 signal mixed quality: at least one dimension shows meaningful divergence from cash reality. Scores below 50 indicate earnings likely overstated relative to economic reality — anchor valuation to operating cash flow, not EPS.
Compare Two Stocks Side by Side
Comparison mode pre-loads two tickers using the URL pattern ?compare=TICKER1,TICKER2 — for example, /tools/earnings-quality-score?compare=MSFT,GOOGL. Enter two tickers and the tool fetches five dimensions from SEC EDGAR for each company, then declares a winner per dimension with an overall verdict.
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. 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.
GAAP vs adjusted gap: what are they adjusting away?
Most companies now report two sets of earnings: GAAP (audited) and “adjusted” (management-preferred). A small gap (<5%) is routine. A large gap (>25%) means management is excluding significant, recurring costs from the number it uses to communicate performance to investors.
DSO trend: are they collecting what they're booking?
Days Sales Outstanding = (Accounts Receivable / Revenue) × 365. 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.
Non-recurring charges: the ones that recur every year
One genuine restructuring charge is a legitimate event. The problem is companies that report restructuring, impairment, or “special” charges year after 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.
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. High-accrual firms mean-revert — the market eventually reprices as accruals unwind — producing returns roughly 10% below low-accrual firms annually.
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. 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 an earnings quality score?
An earnings quality score measures how well a company's reported net income reflects real economic value. It evaluates multiple dimensions — cash flow conversion, accrual ratios, revenue collection trends, and the persistence of 'non-recurring' charges — to produce a 0–100 rating. High scores (75+) indicate earnings backed by strong cash generation and conservative accounting. Low scores (<50) flag significant divergence between reported profits and cash reality, meaning investors should anchor valuation to operating cash flow rather than EPS.
How do you check if earnings are real?
Compare operating cash flow to reported net income — this is the cash conversion ratio. Real earnings convert to cash: a ratio above 1.0 means the company collects more cash than it reports as profit. Below 0.6 means most earnings are accrual-based and haven't been collected yet. Next, check if Days Sales Outstanding (DSO) is rising — that signals the company is booking revenue faster than it's collecting payment. Finally, compare GAAP earnings to the 'adjusted' figure management prefers: a gap above 20% means significant real costs are being excluded from the headline number.
What is accrual ratio in earnings quality?
The accrual ratio measures the portion of reported earnings that exist only as accounting entries rather than cash. It is calculated as (Net Income − Operating Cash Flow) / Total Assets. A high accrual ratio means the company's profits are driven by accounting assumptions — depreciation schedules, revenue recognition timing, warranty reserves — rather than actual cash collected. Richard Sloan's landmark 1996 study found that high-accrual firms systematically underperform low-accrual firms by roughly 10% per year as accruals eventually reverse. The accrual ratio is one of the most robust predictors of future earnings disappointments in academic finance.
Can a company have high earnings but low quality?
Yes — this is one of the most common traps for investors. A company can report strong GAAP earnings while scoring poorly on quality because: (1) cash flow conversion is weak — profits exist on paper but cash isn't arriving, (2) DSO is spiking — revenue is being booked aggressively while collections slow, (3) the GAAP-to-adjusted gap is huge — management is excluding recurring costs like stock compensation or annual restructuring charges to inflate the headline number. For example, a company reporting $500M in net income with only $200M in operating cash flow has a 0.4× conversion ratio — a serious red flag even though the income statement looks strong.
How to compare earnings quality across companies?
Use the 'Compare Two Stocks' mode at the top of this tool. Enter two US-listed tickers and the scorer fetches five earnings quality dimensions from SEC EDGAR for each — FCF/Net Income ratio, accruals ratio, AR vs revenue growth, gross margin trend, and CapEx vs depreciation. Each dimension shows a side-by-side score with a winner indicator and an overall verdict. Industry context matters: capital-intensive businesses (utilities, manufacturing) naturally have lower cash conversion than asset-light models (software, services), so compare within sectors for the most meaningful signal. Share the comparison via URL to collaborate on analysis.
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