A quality of earnings analysis adjusts for one-off expenses, arm's length adjustments to related party transactions, differences in accounting policies and cut-off errors. The result is adjusted EBITDA, which forms the basis of the valuation and the purchase price.
Related terms
EBITDAEarnings before interest, tax, depreciation and amortisation; used as an indicator of the cash-like profitability generated by a company's core operations.Financial due diligenceA detailed review of the target company's financial position, profitability, indebtedness and risks before an acquisition or investment.Completion accountsFinancial statements prepared as at the closing date of an acquisition, through which the final price is set by net debt and working capital adjustments.Cost of capitalThe minimum rate of return investors expect from an investment in return for the risk they take.Discounted cash flow (DCF)A valuation method based on discounting the free cash flows an asset or company will generate in the future to the present using an appropriate discount rate.Earn-outA mechanism under which part of the purchase price is paid depending on the target company reaching certain performance targets after closing.
Last updated: October 22, 2026 · This definition is for general information only.