What is meant by quality of earnings?

Answer 1

In recent years, I've read earnings announcements from companies and I've come to doubt the transparency of even the veracity of what I've been reading. After digging into the financial statements, I've found what I consider some dubious earnings reporting. Financial analysts are increasingly concerned about earnings reporting and have reached certain conclusions.
* The measure of quality is the degree to which earnings are generated from internally developed initiatives, as opposed to external forces.

* If a company has increased earnings year over year from improved cost efficiencies or sales generated from a marketing campaign, that company has a high quality of earnings.

* If a company's earnings are attributed to outside sources such increasing commodity prices, this is seen as low quality of earnings.

* It has also come to mean the degree to which management's choices of accounting estimates can affect reported income.

* Some analysts question whether some firms engage in "earnings management."

Answer 2

Increased earnings due to increased sales and cost controls, as compared to artificial profits created by inflation of inventory or other asset prices.