.Explain: Earnings Quality, Potential and Level in a valuation setting

.Explain: Earnings Quality, Potential and Level in a valuation setting

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Expert Solution

When we talk about earning quality, potential earnings with reference to valuation this generally means that the earnings shown on the balance sheet should be sustainable and not manipulated by the management to avoid negative reaction in stock price. The company earnings can be significantly affected if in any quarter or financial year there has been a sale of asset or any particular division or there has been any significant write off in the current years, earning should be adjusted for these effects and then they should be used in the valuation process, this is because the sustainable earning which are coming from the core operations of the company has to be used while valuing asset not the fire sale asset price because then the price calculated through this method would not be reliable. The potential earnings of a company is how much the company will be able to generate earnings from its assets on year after year. The stage valuation or Level method is normally an approach that is used in the valuation of the startup. Startup companies at the beginning of their life do not generate profits.

jeff jeffy answered 1 year ago

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