When is a dollar not a dollar? Did you ever hear someone refer to "quality of earnings"? Why do they say that? Is there a such thing as earnings that lack quality? Actually from an investment perspective there is.
I have given this a lot of thought, but most often in terms of real estate. Sometimes properties that are being prepared for sale have a lot of cosmetic improvements made while important maintenance and operational activities are suspended to show increased profit. History has shown us that it is not uncommon for companies to 'dress up' quarterly reports in the same manner. That is why smart real estate investors always want to see expense records for several years. The following was found on Investopedia.com:(http://www.investopedia.com/terms/q/qualityofearnings.asp)
- Quality earnings are the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory.
- Quality of earnings is considered poor during times of high inflation. Also, earnings that are calculated conservatively are considered to have higher quality than those calculated by aggressive accounting policies
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