Quality of Earnings Analysis
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PL Analysis
Analyze historical revenue, gross profit, operating expenses, and EBITDA to identify trends, unusual or non-recurring items, and potential normalization adjustments. The analysis helps bridge reported results to an adjusted earnings base that better reflects the company’s ongoing operating performance. Typical focus areas:
- Revenue and margin trends
- EBITDA normalization and adjustments
- Non-recurring or non-operating items
- Expense/variance trends and run-rate considerations
BS Analysis
Review significant assets and liabilities to identify unusual balances, trends, classification issues, and items that may affect normalized working capital, net debt, debt-like items, or purchase price considerations. Typical focus areas:
- Accounts receivable and aging
- Inventory trends and reserves
- Accounts payable and accrued liabilities
- Debt-like items and working capital trends
Concentration Risks
Evaluate the degree to which revenue and profitability depend on individual customers, locations, products, vendors, or other key relationships. Typical focus areas:
- Customer stickiness and concentration
- Revenue by customer, product, or location
- Customer wins and losses
- Vendor or supplier concentration
Reconciliations
Reconcile detailed financial data to the general ledger and reported financial statements to validate the completeness and consistency of information used throughout the analysis. Differences, gaps, and data limitations are identified and evaluated before conclusions are drawn. Typical focus areas:
- Trial balance to financial statements
- Reported revenue to bank statements (proof of cash) and to GL detail
- Supporting schedules to account balances
- Identification and resolution of reconciliation differences
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