What is Quality of Earnings (QoE)?
Reviewed by CA Apurav GargLast reviewed
In short
A Quality of Earnings (QoE) review restates a business's reported revenue and EBITDA after removing one-off, non-recurring or wrongly timed items, so a buyer, investor or lender sees the earnings the business can repeat.
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What a QoE review is
A Quality of Earnings review is a financial due diligence report, usually commissioned by a buyer, investor or lender before a deal, and sometimes by the business itself before going to market. It asks one question: what does this business actually earn, in a normal year, that will carry on after the deal?
It is not a statutory audit. An audit gives an opinion on whether the financial statements are fairly presented. A QoE review starts from those statements, or from the management accounts, and adjusts them to show normalised EBITDA, the figure a valuation multiple is usually applied to.
The usual adjustments
- One-off items added back: legal settlements, restructuring, a warehouse move, fundraising costs.
- Owner-related items normalised: founder salaries above or below a market rate, or personal expenses paid by the company.
- Accounting errors and timing corrected: revenue booked in the wrong period, expenses not accrued, missing provisions.
- Run-rate items: the full-year effect of a price change or a new contract, shown separately so it is not mixed with actual results.
What it finds in D2C and marketplace businesses
- Revenue at GMV, not net revenue. Checkout discounts, cancellations, RTOs and returns not deducted.
- Marketplace receivables that never arrive. Fees, penalties and claim rejections deducted in settlements but not booked.
- No provision for returns on sales made just before year-end.
- Stock carried at cost although part of it can only be sold at a discount, or has expired.
- GST and TDS gaps: input tax credit claimed but not in GSTR-2B, or TCS and TDS credits booked but not reflected in the returns, which become liabilities in the deal.
Net working capital and debt
A QoE review usually also sets a normal level of working capital and lists debt-like items, such as unpaid statutory dues, customer advances and deferred payments. The deal price is adjusted if the business is handed over with less working capital or more such items than agreed.
How to prepare
Clean, reconciled books shorten a QoE review and reduce price renegotiation: monthly settlement-to-bank reconciliations, a channel-wise P&L that ties to the GST returns, stock counts, and a list of one-off items with their supporting papers.
Example in rupees
A D2C brand's management accounts show EBITDA of ₹1.20 crore for the year. The QoE review finds:
| Item | Effect on EBITDA |
|---|---|
| EBITDA as reported by management | ₹1,20,00,000 |
| Sales booked at GMV: discounts given at checkout not deducted | − ₹18,00,000 |
| Returns after year-end on March sales, not provided for | − ₹9,00,000 |
| Slow-moving stock written down to what it can be sold for | − ₹7,00,000 |
| March agency and warehouse bills not yet booked | − ₹6,00,000 |
| One-off: legal fees for a trademark dispute, settled | + ₹5,00,000 |
| One-off: cost of shifting the warehouse | + ₹4,00,000 |
| QoE (adjusted) EBITDA | ₹89,00,000 |
Reported EBITDA overstated repeatable earnings by ₹31,00,000. At a valuation multiple of 10 times EBITDA, that is a ₹3.1 crore difference in the price. The figures are illustrative.
Related terms
Work it out for your business
Want help applying this to your own accounts?
We handle bookkeeping, GST and TDS for D2C and marketplace sellers, and can walk you through how this works in your business.
General information only, not professional advice. Rules and rates change — check the official source before you act.