Answers / Financial Due Diligence
What is a quality of earnings report?
A core Financial Due Diligence interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
A quality of earnings report is the core deliverable of financial due diligence: it rebuilds a target's reported EBITDA into a sustainable, normalized figure a buyer can price. The QoE analysis strips out non-recurring items, normalizes related-party and owner costs, corrects cut-off and accounting-policy effects, and flags revenue-quality risks such as customer concentration. Because deals price on a multiple of EBITDA, every euro of adjustment moves enterprise value by that multiple — which is why the adjustment schedule, not the audit opinion, is where the negotiation actually happens. An audit asks 'is it compliant?'; a QoE asks 'is it sustainable?'
WHAT INTERVIEWERS LISTEN FOR
- ✓Normalized, sustainable EBITDA as the pricing basis — the FDD core deliverable
- ✓Scrutinizes add-backs: one-off vs. recurring, related-party costs, cut-off effects
- ✓Covers revenue quality: concentration, churn, aggressive recognition
- ✓Audit ≠ QoE: compliance opinion vs. sustainability of earnings
COMMON MISTAKES
- ✗Equating a QoE with an audit
- ✗Accepting management's add-back schedule unchallenged
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