Study Notes: Business Finance & Accounting

Profit quality

One of the issues to consider when looking at the income statement is to look at whether the reported profit is “high quality” or “low quality”. What is the difference?

A high quality profit is one which can be repeated or sustained.  In other words the profit does not contain any unusual one-off items of income or profit which shareholders cannot reasonably expect the business achieve in the following year.

A low quality profit is one which it is difficult to repeat.  The profit is likely to benefit from one or more “exceptional items” which will not repeat.  Examples of exceptional items include:

• One-off profits on selling major items of property, plant and equipment (e.g. selling a piece of land)
• Income from a significant insurance claim
• Profits from selling business units or brands