QOE Report
QOE Report
A QOE Report, aka Quality of Earnings Report, analyzes a company’s financials to check if the business is profitable. For example, a tech startup can show big profits after one project, but a QOE report can suggest that the company isn’t as profitable as it looks.
When assessing a company’s financial health, it’s not just about the revenue numbers but how that revenue is generated. A Quality of Earnings (QOE) report dives deep into a company’s financials to determine whether its earnings are sustainable, accurate, and free from distortions that could mislead potential buyers or investors.
During the valuation process, buyers scrutinize the numbers to identify any financial adjustments that could impact the company’s value. If they find something that benefits the seller, they aren’t obligated to disclose it, so sellers should conduct their own QOE evaluation before a sale.
A thorough QOE report helps uncover financial adjustments that could increase adjusted EBITDA, highlight operational inefficiencies, and flag potential risks.
Some of the most common issues identified in a QOE report include non-recurring events and expenses that can be removed from financial statements. For instance, if the business recently settled a lawsuit with hefty legal fees, those one-time expenses wouldn’t be factored into future earnings.
Similarly, non-operational expenses—such as a business owner running personal expenses like vacations or vehicle purchases through the company—are adjusted to reflect the true financial picture.
Other key areas of a QOE assessment include accounting errors, where financial statements may not align with GAAP standards, and pro forma adjustments, which account for recent investments like purchasing new equipment to improve efficiency—that might not yet be reflected in the financials.
The report also evaluates historical earnings trends, key cost drivers, the quality of balance sheet accounts, and financial risks tied to major customers, vendors, or key employees.
Beyond revenue adjustments, a QOE report examines critical factors like working capital requirements, key contract terms, accounting policies, and IT systems that impact financial reporting. This level of due diligence ensures that buyers and sellers have a clear, realistic picture of the company’s proper financial position, which can ultimately increase deal transparency and maximize business value.
Like Scooby-Doo and the gang unveil who’s behind the mask, a QOE report checks sustainable earnings.
FAQs
How much does a QOE report cost?
The cost of a Quality of Earnings (QOE) report varies based on the complexity of the business, the depth of the analysis, and the size of the transaction. Generally, a QOE report can range from $25,000 to $100,000.
Smaller deals with straightforward financials may be on the lower end. At the same time, larger, more complex businesses with multiple revenue streams, adjustments, or international operations require a more detailed review, driving higher costs.
The investment in a QOE report is often worth it, as it helps buyers avoid overpaying and sellers maximize their company’s value.
What is the difference between an audit and a QOE?
While an audit and a QOE report assess financial data, they serve different purposes.
- An audit is focused on compliance. It verifies that financial statements are accurate, follow accounting standards (GAAP or IFRS), and ensure proper financial reporting for regulatory purposes.
- A QOE report is more strategic. It analyzes the sustainability and reliability of earnings, identifies non-recurring expenses, adjusts revenue and costs to reflect true profitability, and helps buyers and sellers make informed investment decisions.
Audits are typically backward-looking, verifying past financials, while a QOE report is forward-looking, helping determine whether a company’s earnings are repeatable and predictable in the future.
What is QoE in banking?
In banking and finance, Quality of Earnings (QOE) refers to how sustainable and reliable a financial institution’s earnings are. Banks and financial firms undergo QOE evaluations to determine whether their income—such as interest revenue, loan repayments, and fees—is stable or includes volatile or non-recurring sources.
Investors and regulators analyze QOE in banking to assess financial risk, lending stability, and long-term profitability.
What are QoE adjustments?
QOE adjustments modify a company’s financial statements to reflect a more accurate, sustainable view of earnings. These adjustments help eliminate financial distortions caused by one-time events, errors, or unusual expenses that don’t reflect the business’s true earning potential. Common QOE adjustments include:
- Removing non-recurring expenses, such as lawsuit settlements or discontinued operations
- Adjusting for non-operational expenses, like a business owner running personal expenses through the company
- Correcting accounting errors that may not comply with GAAP standards
- Pro forma adjustments to reflect operational improvements (e.g., new equipment reducing future costs)
- Normalizing working capital requirements to account for seasonal cash flow fluctuations
These adjustments help buyers and investors see a business’s true earning power beyond what standard financial statements show.
What is a good QoE ratio?
A Quality of Earnings ratio measures how much of a company’s net income comes from core business operations rather than accounting adjustments, one-time gains, or non-operational income. It is calculated as:
A ratio above 1.0 indicates that most of the company’s income comes from sustainable, cash-generating activities—a sign of strong financial health. A ratio below 1.0 suggests that a significant portion of earnings comes from non-cash adjustments or non-recurring sources, which can be a red flag for investors.
