Earnings quality

Earnings quality is a composite assessment of how reliable reported earnings are as a predictor of future cash flow. It is not a single metric but a battery: OCF/NI conversion, the accruals ratio (Sloan's classic), the Beneish M-Score, the tax-rate trajectory (sudden tax-rate drops are suspect), and the consistency of one-time charges (a company that takes a 'one-time' charge every year is really running a structural-cost line). We synthesize these into a quality-gate pass/fail assessment that runs before any valuation work. A failed gate is rare — perhaps 15–20% of names — but it is a hard veto: regardless of headline-cheapness, growth, or moat narrative, we do not issue a buy rating on a quality-gate-failure name without an explicit reconciliation that explains why each flag is benign or transient. The asymmetry of the risk (large permanent capital impairment on the bad outcome) justifies the conservative posture.