The quality of earnings ratio is a financial metric that assesses the sustainability and reliability of a company's earnings by comparing its cash flow from operations to its net income. This ratio provides insight into how much of the earnings reported are backed by actual cash generation, indicating whether the company can maintain its earnings level in the future. A higher quality of earnings ratio suggests that the company is more likely to sustain its performance, while a lower ratio raises red flags about potential earnings manipulation or volatility.
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