Quality of Earnings Report

A detailed analysis of all of the components of a target company’s revenue and expenses is critical to understanding the sustainability and accuracy of historical earnings, as well as providing insight into future earnings projections. The Transaction Services team at Brady Ware understands the importance of a quality of earnings report in either substantiating an offer price or identifying reasons why the offer might be amended.

Each of our quality of earnings reports focuses on those items considered to be the most critical. We examine the other aspects, but we don’t build extensive reports in those areas to justify our fees or lengthen our presentations. You receive what you need and want, with an emphasis on the critical aspects of earnings that might impact a valuation and purchase price.

Our financial due diligence may include:

  • Revenue breakdown by key components such as customers and product/service lines
  • Revenue analysis based on company generated versus external windfalls
  • Analysis of historic revenue trends
  • Determination of one-time expenses vs. recurring expenses
  • Determination of fixed vs. variable costs
  • Analysis of assumptions used in cash flow projections and scenario analysis
  • Cash flow verification and proof of cash on hand

But we go beyond the numbers themselves to provide a report that identifies potential concerns based on other factors that might distort the true earnings picture. Some of our further analysis includes:

  • True underlying run rate of revenue, apart from fiscal year end adjustments and timing issues
  • Proper recognition and timing of both revenue and expenses
  • Related party transactions and their handling
  • Risk of future earnings based on issues such as
    • Concentration of customers
    • Cost structure and sourcing considerations
    • Price strategy and elasticity
    • Dependence of revenue on intellectual property strength and expiration timing

To learn more about Brady Ware’s approach to Quality of Earnings reports, contact Jim Kaiser at jkaiser@bradyware.com or 937.913.2528.