Quality of Earnings
Ninad RamdasiCategories: DSIJ_Magazine_Web, DSIJMagazine_App, Editorial, Letter to Editor, Letter to Editor
Your cover story on mid-cap and small-cap stocks in the 1,000th magazine issue was well-researched and comprehensive.
Your cover story on Mid-Cap and Small-Cap stocks in the 1,000th magazine issue was well-researched and comprehensive. I agree with your view that this is the best time to tactically shift focus from Large-Caps and allocate more monies to the broader markets. What is the quality of earnings and how can a retail investor assess the same while analysing mid-cap and small-cap stocks? - Krupa D
Editor Responds: We appreciate your kind words of encouragement. To answer your query, the quality of earnings is the part of income which is attributable to the core operating activities of a company. Thus, if a company reports an increase in profits due to improved sales or cost reductions, the quality of earnings is considered to be high. Conversely, low-quality earnings can be due to aggressive revenue recognition practices or use of complicated accounting assumptions to temporarily boost earnings. Investors should exercise caution particularly when analysing small-cap stocks and conduct thorough financial due diligence before making an investment decision. Hope this helps. Keep writing to us.