AdvancedStock Alerts + Tools0:44Fundamentals

Are the Profits Real?

Quality of earnings asks whether reported profit is backed by cash and likely to repeat — two questions the income statement never answers.

0:44 · 6 scenes

This lesson is part of a Stock Alerts + Tools plan.

What the lesson covers

0:00Two companies report the same profit. One of them is telling the truth.
0:05The two tests. Is the profit backed by cash, and would it happen again next year?
0:14The accruals check. Profit minus operating cash flow. A large, growing gap is the warning.
0:23Where the gap comes from. Usually receivables or inventory building up faster than sales.
0:31What it is not. A gap is a question, not an accusation. Fast growth creates one honestly.
0:39Compare profit with cash, then go and find out why they differ.

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