Quality of Earnings (QoE) Analysis

Pursant performs both sell-side and buy-side QoE analysis. In either case, the overarching objective is to provide a vetted, defensible financial information package to facilitate, support and drive an efficient and effective financial and accounting due diligence process.

Our QoE process analyzes a company’s income statements, balance sheets, net working capital and cash flow considerations.  While our specific scope and approach is tailored to each transaction, typically, we:

  • Assess information both on a monthly basis and summarized periods, including quarterly, annually and/or trailing twelve-month period.
  • Validate any proposed adjustments and identify other necessary adjustments to ensure the adjusted results reflect the future performance that can be expected.
  • Evaluate historical trends, key performance indicators, budgets/forecasts, as well as the financial/accounting environment including policies, practices, reporting and talent.
  • Support the legal documentation process to ensure financial/accounting considerations (e.g., definition of terms, working capital mechanisms,) are properly reflected in the transaction documents.

The overall outcome of our comprehensive review is to help parties assess a business’ financial profile and identify insights, findings and enhancement opportunities related to financial performance, working capital management, accounting environment, governance practices, risk management activities and general business policies.  As part of assessing the financial profile, we will provide a strong viewpoint on the accuracy and sustainability of the earnings, while simultaneously highlighting transaction related risks, including mitigation strategies.

Examples of common findings from a QoE analysis include:

  • Deficient accounting policies and procedures
  • Excessive customer revenue concentration
  • Transactions with undisclosed related parties
  • Inaccurate period-end or out-of-period adjustments
  • Unusual revenue or expense items
  • Insufficient loss reserves
  • Overly optimistic (or conservative) projected financial statements