PastPaperHero | Industry and company analysis - Earnings quality and cash flow modeling

Learning Outcomes

This article explains how to evaluate earnings quality and model cash flows for industry and company analysis in the CFA Level 2 exam, including:

Assessing the sustainability and persistence of reported earnings relative to a firm’s economic performance.
Distinguishing between cash-based and accrual-based components of earnings and interpreting their implications for earnings quality.
Applying accruals ratios and the gap between net income and operating cash flow as diagnostic tools for low-quality reporting.
Identifying common earnings management tactics, aggressive accounting choices, and red flags in financial statements and disclosures.
Evaluating how capitalization policies, one‑off items, and changes in estimates affect both earnings sustainability and reported cash flows.
Building and interpreting operating, free, and discretionary cash flow models to support valuation, credit analysis, and risk assessment.
Adjusting historical and forecast cash flows for nonrecurring items and accounting distortions to derive normalized inputs for DCF-based valuation.
Integrating findings from earnings quality and cash flow analysis into industry and company comparisons, investment decisions, and exam-style case questions.
Using balance-sheet‑based and cash‑flow‑based accruals ratios (including net operating assets) to evaluate the likelihood of earnings mean reversion.
Linking free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) to reported financial statements and identifying when net income or EBITDA is a poor proxy for cash flow.

CFA Level 2 Syllabus

For the CFA Level 2 exam, you are required to understand and apply concepts related to earnings quality and cash flow modeling when analyzing industries and companies, with a focus on the following syllabus points:

Assessing indicators of earnings quality and the persistence of reported profits.
Identifying earnings management techniques and low-quality reporting risks.
Evaluating accruals and distinguishing between cash and noncash earnings.
Modeling cash flows and interpreting their impact on valuation.
Recognizing the implications of accounting choices on earnings and reported cash flow.
Detecting red flags for aggressive or misleading financial reporting.
Normalizing earnings and cash flows for use in DCF and multiples-based valuation.
Comparing free cash flow measures (FCFF, FCFE, discretionary cash flow) across firms and industries.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

An analyst is reviewing Delta Components, a cyclical manufacturer. Selected information (in $ millions) is shown below.

Net income has grown from 80 to 120 over three years.
Cash flow from operations (CFO) has been flat at about 70 each year.
Accounts receivable have grown much faster than sales.
The firm has reclassified several recurring restructuring charges as “special items.”

Which factor is the strongest indicator that Delta’s reported earnings may be of low quality?

a) Three years of rising net income despite flat CFO.
b) Cyclical business model and exposure to economic downturns.
c) Recognition of restructuring charges below the operating income line.
d) Increasing depreciation due to recent capital expenditure.

Based on the same information for Delta Components, which diagnostic ratio would most directly capture the risk arising from earnings not supported by cash?
a) Net profit margin.
1. Accruals ratio based on (Net income − CFO) divided by average total assets.
2. Asset turnover.
3. Interest coverage ratio.
A software company, NovaSoft, reports the following (in $ millions) this year:

Net income: 60
CFO: 40
Capitalized development costs: 25 (previously expensed as incurred)
Average total assets: 500

All else equal, what is the most appropriate conclusion about NovaSoft’s earnings and cash flows?

a) Earnings quality has improved because capitalizing R&D increases future CFO.
b) Earnings quality has deteriorated because expenses have been deferred, inflating current income.
c) Earnings quality is unchanged because the accounting change is cash-neutral.
d) Earnings quality has improved because total assets increased, lowering the accruals ratio.

An IFRS-reporting firm classifies interest paid as a financing cash flow. A peer, reporting under U.S. GAAP, classifies interest paid as an operating cash flow. When comparing operating cash flow (CFO/OCF) between the two firms, which adjustment is most appropriate?
a) Reclassify interest paid for the IFRS firm from financing to operating to improve comparability.
1. Reclassify interest paid for the U.S. GAAP firm from operating to financing to improve comparability.
2. Do not adjust; classification differences do not affect comparability of CFO.
3. Add interest paid to investing cash flows for both firms.
Omega Retail reports positive net income but negative CFO for the last two years. Inventory has increased sharply, and the firm has extended more generous credit terms to customers. Which conclusion is most appropriate?
a) Earnings are low quality because reported profits are not converting into cash.
1. Earnings are high quality because inventory growth indicates strong future sales.
2. Earnings quality is unaffected; working capital changes are irrelevant to cash flow analysis.
3. Earnings quality is high because CFO is negative mainly due to capital expenditures.

Introduction

Earnings quality and cash flow modeling are central to industry and company analysis for the CFA Level 2 exam. High-quality earnings reflect a company's true economic performance and are more likely to persist into future periods. Analysts must judge whether reported profits can be trusted, whether they are sustainable, and whether they faithfully represent the company's financial condition. This article explains how to evaluate earnings quality, interpret accruals and cash flows, and identify risks of misleading reporting or earnings management.

Key Term: earnings quality
Earnings quality is the degree to which reported profits reflect a company's actual economic performance and are likely to persist in future periods.

High-quality earnings are not just “high”; they are:

Adequate, in the sense that they cover the company’s cost of capital and create value.
Sustainable, meaning they are derived from core operations rather than one‑off gains.
Backed by cash, meaning the accrual component is not excessive or highly discretionary.

Because discounted cash flow and multiples-based valuation models rely heavily on future earnings and cash flow forecasts, any distortion in the historical base figures can lead to misvaluation. Level 2 questions often require you to:

Disentangle recurring from nonrecurring earnings.
Rebuild cash flow measures such as free cash flow to the firm (FCFF) and to equity (FCFE) from reported data.
Adjust for accounting choices that inflate or depress earnings and cash flows.

Key Term: persistence
Persistence is the tendency for profits or losses to continue in future periods.

Indicators of Earnings Quality

Persistent vs. Transitory Earnings

High-quality earnings are those that are both adequate and persistent. A firm that earns a return consistently above its cost of capital from core operations is generating high-quality earnings, even if year‑to‑year fluctuations occur.

Transitory items reduce earnings quality even if they increase current reported profit. Examples include:

Gains on asset sales.
Fair value gains on investments that are not expected to recur.
One‑time restructuring gains or releases of reserves.
Gains from bargain purchases or legal settlements.

A useful decomposition is:

Core operating earnings: recurring income from the main business.
Non-core operating earnings: recurring but peripheral (e.g., equity income from associates for a manufacturing firm).
Transitory items: gains or losses not expected to persist.

High-quality earnings are dominated by core, recurring operating components.

Key Term: nonrecurring items
Nonrecurring items are gains or losses that are unusual, infrequent, or both, and are not expected to persist into future periods.

Accruals and Cash Flows

Reported net income includes both cash and accrual components. Accruals arise when revenues or expenses are recognized before cash is received or paid.

Key Term: accruals
Accruals are noncash adjustments to net income due to recognition of revenues and expenses before or after associated cash flows.

Key Term: operating cash flow (OCF)
Operating cash flow (OCF), also called cash flow from operations (CFO), is the cash generated from a company's core business activities, usually reported on the statement of cash flows.

Not all accruals are bad—many are mechanical and necessary, such as depreciation or standard allowances for doubtful accounts. The problem lies in:

Large, unusual, or fast‑growing accruals.
Discretionary accruals based on subjective estimates (e.g., provisions, impairment tests).

A simple way to measure the accrual portion of earnings is:

\text{Total accruals} = \text{Net income} - \text{CFO}

A commonly used accruals ratio is:

\text{Accruals ratio} = \frac{\text{Net income} - \text{CFO}}{\text{Average total assets}}

Key Term: accruals ratio
The accruals ratio is the proportion of earnings not supported by operating cash flow, typically measured as total accruals divided by an asset base such as average total assets or average net operating assets.

When earnings are mostly cash-based (low accruals ratio), they are considered higher quality. Unusually large accruals, or an increasing gap between net income and operating cash flow, are warning signs.

The Level 2 curriculum also introduces a more refined, net‑operating‑asset-based approach.

Key Term: net operating assets (NOA)
Net operating assets equal operating assets minus operating liabilities, where operating items exclude cash, marketable securities, and interest‑bearing debt.

Under the balance sheet approach:

\text{Accruals}^{BS} = \text{NOA}_{\text{END}} - \text{NOA}_{\text{BEG}}

\text{Accruals ratio}^{BS} = \frac{\text{NOA}_{\text{END}} - \text{NOA}_{\text{BEG}}}{\left(\frac{\text{NOA}_{\text{END}} + \text{NOA}_{\text{BEG}}}{2}\right)}

Under the cash flow statement approach:

\text{Accruals}^{CF} = \text{Net income} - \text{CFO} - \text{CFI}

\text{Accruals ratio}^{CF} = \frac{\text{Net income} - \text{CFO} - \text{CFI}}{\left(\frac{\text{NOA}_{\text{END}} + \text{NOA}_{\text{BEG}}}{2}\right)}

where CFI is cash flow from investing activities. In both cases, a higher ratio indicates lower earnings quality.

Key Term: cash flow from operations (CFO)
Cash flow from operations (CFO) is the cash flow subtotal in the statement of cash flows that reflects cash generated or used by the firm’s operating activities.

Mean Reversion and the Accrual Component

Empirical evidence shows that extreme levels of earnings tend to revert toward normal levels over time.

Key Term: mean reversion
Mean reversion is the tendency for unusually high or low earnings to move back toward a normal level over time.

Earnings composed largely of accruals tend to mean‑revert faster than earnings based mainly on cash flows, especially when:

Accruals are heavily discretionary (e.g., aggressive revenue recognition, optimistic provisions).
Working capital builds (e.g., rising receivables or inventory) are supporting reported revenue growth.

For valuation, this implies:

A firm with unusually high earnings driven by large accruals should not be projected to maintain that level indefinitely.
Conversely, a firm with temporarily depressed accrual‑heavy losses (e.g., due to conservative provisioning) may see earnings recover more quickly.

Earnings Management and Aggressive Reporting

Companies may use various tactics to inflate reported earnings or smooth volatility, including:

Recognizing revenue prematurely (e.g., bill‑and‑hold, channel stuffing, liberal cut‑off).
Deferring expenses by capitalizing costs that should be expensed (e.g., routine maintenance, development costs without clear future benefits).
Classifying recurring items as “nonrecurring” or “special” to present an inflated measure of “adjusted” earnings.
Manipulating reserves or allowances (e.g., bad debts, warranty provisions, restructuring reserves) to shift income across periods.

Key Term: earnings management
Earnings management is the deliberate use of accounting choices or estimates to influence reported profits or meet analyst expectations, often without changing actual cash flows.

Subjective areas with significant scope for earnings management include:

Revenue recognition policies (shipping terms, return rights, multi‑element arrangements).
Share‑based compensation valuation assumptions (particularly volatility and expected life).
Pension and post‑retirement assumptions (discount rate, salary growth, expected asset return).
Fair value estimates for Level 3 assets and goodwill impairments.

Excessively smooth earnings or consistently beating consensus forecasts by a small margin are further red flags, suggesting that management may be managing accruals to achieve targets.

Common Red Flags for Low Earnings Quality

Analysts should monitor both trend and cross‑sectional comparisons. Warning signs include:

Rapid accrual growth outpacing revenue growth.
Consistent divergence between profit and operating cash flow.
Rising days' sales outstanding or decreasing asset turnover.
Significant one-off gains boosting profit or frequent “nonrecurring” items that seem recurring.
Frequent changes in accounting policies or key estimates without clear economic justification.
Stable or rising margins despite deteriorating competitive conditions.
Large or growing Level 3 fair value assets relative to equity for financial firms.
For banks, declining allowance for loan losses relative to nonperforming loans or net charge‑offs.
For insurers, combined ratios near or above 100% but earnings supported by investment or realized gains.

External indicators include regulatory investigations, restatements, or auditor disputes, although these typically emerge only after quality problems have already developed.

Evaluating Cash Flow Modeling

Reliable cash flow modeling is critical to understanding a company's value and risk profile. Cash flows can be modeled at different levels:

Operating cash flow: Indicates if profits are supported by actual cash generation.
Free cash flow: Assesses debt service capacity and the company's ability to invest or pay dividends.
Discretionary cash flow: Evaluates resources available after capital expenditures and mandatory obligations.

Key Term: free cash flow (FCF)
Free cash flow (FCF) is cash available to providers of capital after the firm has met its operating expenses and required investments in working capital and fixed capital.

Key Term: free cash flow to the firm (FCFF)
FCFF is the cash flow available to all capital providers (debt and equity), typically calculated as CFO plus after‑tax interest minus net capital expenditures.

Key Term: free cash flow to equity (FCFE)
FCFE is the cash flow available to common shareholders after all expenses, reinvestment needs, and net debt financing (borrowings minus repayments).

Key Term: discretionary cash flow
Discretionary cash flow is the cash remaining after funding capital expenditures necessary to maintain the asset base and meeting required debt repayments and other fixed obligations.

High-quality cash flow is characterized by:

Positive and stable CFO derived from core activities.
Adequacy of CFO to cover maintenance capex, interest, taxes, and, ideally, dividends.
Reasonable alignment between CFO and net income over time.
Limited reliance on asset sales or reclassifications to generate CFO.

Indicators of Cash Flow Quality

A cash flow statement should be interpreted in light of the firm’s life cycle and industry norms:

Early‑stage growth firms may have negative CFO and investing cash flows, financed by equity issuance—this can be acceptable.
Mature firms with persistent negative CFO financed by new debt or equity signal serious problems.

Typical indicators of poor cash flow quality include:

Large and persistent differences between CFO and net income that cannot be explained by growth in working capital or industry specifics.
Sudden spikes in CFO associated with lengthening payables or factoring receivables (short‑term window dressing).
Significant “other” adjustments in the reconciliation from net income to CFO.
Reclassification of cash flows to operating from investing or financing to boost reported CFO (possible under IFRS).

Management can influence CFO through timing decisions:

Delaying payments to suppliers (raising payables).
Accelerating collection of receivables or selling receivables.
Altering inventory purchasing patterns.

Analysts should corroborate CFO trends with working capital turnover ratios and disclosures on factoring or supply chain finance.

Interpreting Accruals Ratios

The accruals ratio quantifies the proportion of net income not supported by cash flow. In its simple form:

\text{Accruals ratio} = \frac{\text{Net income} - \text{Operating cash flow}}{\text{Average total assets}}

A high or rising accruals ratio signals low earnings quality. As a rough guide in practice, ratios above about 5–10% may warrant closer scrutiny, particularly if:

They are rising over several years.
The firm is also showing aggressive revenue growth with weak cash conversion.

From the curriculum’s more advanced approach, the NOA-based ratios introduced earlier often provide better comparability across firms and time because they focus on operating activities.

Key Term: core earnings
Core earnings are earnings adjusted to remove nonrecurring items and accounting distortions, intended to represent the firm’s sustainable, core profitability.

Accruals analysis is a bridge from reported earnings to core earnings and, ultimately, to free cash flow.

Worked Example 1.1

A company reports net income of $100 million, but its operating cash flow is only$ 60 million. Total assets average $500 million. Calculate the accruals ratio and comment on earnings quality.

Answer:
Accruals ratio
= $(100 − 60) / 500$
= $40 / 500$
= 0.08 (or 8%).

An accruals ratio in the high single digits suggests that a significant portion of earnings is not backed by cash. On its own this is not proof of manipulation, but combined with weak working capital metrics or aggressive accounting, it would raise concerns about earnings persistence.

Worked Example 1.2

XYZ Ltd. capitalizes $20 million of software development costs as an intangible asset. If these costs would otherwise be expensed, what is the immediate effect on earnings quality?

Answer:
Capitalizing development costs increases current‑period net income (and assets) relative to immediate expensing because the cost is spread over future periods through amortization. However, the fundamental economics are unchanged—the firm has consumed resources this period. Deferring expense recognition makes current profits look stronger and less representative of sustainable performance, reducing earnings quality unless the capitalization policy is clearly justified and applied consistently.

Worked Example 1.3

You are given the following data for Bravo Corp. (all in $ millions):

Net operating assets at start of year: 400
Net operating assets at end of year: 460
Net income: 90
CFO: 70
CFI: −50

Compute both the balance‑sheet‑based and cash‑flow‑based accruals ratios and interpret the results.

Answer:
Balance sheet accruals:
$\text{Accruals}^{BS} = 460 − 400 = 60$

Average NOA = $(460 + 400)/2 = 430$

Accruals ratio $^{BS}$
$= 60 / 430 ≈ 14.0\%$

Cash flow accruals:
$\text{Accruals}^{CF} = \text{NI} − \text{CFO} − \text{CFI} = 90 − 70 − (−50) = 70$

Accruals ratio $^{CF}$
$= 70 / 430 ≈ 16.3\%$

Both ratios are relatively high, indicating that a substantial portion of reported earnings arises from accruals rather than cash. Unless justified by strong growth and working capital investment, this would be a warning sign for earnings quality and forecast persistence.

The Role of Accounting Choices

Management's flexibility in accounting—such as depreciation methods, inventory valuation, leasing classification, share‑based compensation measurement, and pension assumptions—can significantly affect earnings quality and cash flow.

Examples:

Depreciation and amortization: Choosing longer useful lives or slower methods (e.g., straight‑line instead of accelerated) boosts current earnings and CFO (because less depreciation reduces tax payments) but increases future expenses.
Inventory methods (where applicable): Under certain regimes, using FIFO instead of weighted average in an inflationary environment raises gross margins and inventories, affecting both earnings and working capital.
Share-based compensation: Lower assumed volatility in option pricing reduces expense today and defers recognition of compensation cost.
Pension assumptions: A higher discount rate reduces the present value of obligations and periodic pension expense, increasing earnings. Under some standards, expected return assumptions affect profit as well.

Analysts must identify aggressive policies and, where possible, adjust reported numbers to better approximate actual performance.

Worked Example 1.4

A bank reports the following (in $ millions):

Nonperforming loans: 600
Allowance for loan losses: 338
Net loan write‑offs during the year: 188
Provision for loan losses (income statement): 122

Evaluate whether loan loss provisioning appears aggressive or conservative.

Answer:
Key ratios:

Allowance to nonperforming loans
= $338 / 600 ≈ 0.56$
This indicates that only 56% of nonperforming loans are covered by reserves, which may be low.

Allowance to net loan charge‑offs
= $338 / 188 ≈ 1.80$
Reserves are about 1.8 times annual net write‑offs, down from over 2.5 in many conservative banks.

Provision to net loan charge‑offs
= $122 / 188 ≈ 0.65$
The bank is provisioning only 65% of actual losses during the year, causing reserves to decline.

Together, these trends suggest aggressive accounting: the bank may be understating current credit costs, boosting earnings at the expense of future earnings and capital.

Exam Warning

Earnings management often involves “cookie jar” reserves—overstating expenses or provisions in good years and releasing them in weak periods. Beware of reversals in allowances or reserves that boost profit in later periods. Examine:

Large provisions followed by several years of releases.
Changes in reserve methodologies not clearly tied to economic conditions.
Disclosures showing that operating expenses are being funded from prior restructuring reserves.

Using Cash Flow Analysis in Company Valuation

Analysts rely on cash flow modeling for:

Discounted cash flow valuation (e.g., DCF, FCFE, or FCFF models).
Assessing dividend and share repurchase sustainability.
Measuring financial health and default risk.
Comparing firms across an industry on a free‑cash‑flow yield basis.

Forecasts should adjust historical cash flows for nonrecurring items and normalize for economic conditions.

Key Term: normalized earnings
Normalized earnings are earnings adjusted to reflect a mid‑cycle or sustainable level of profitability, removing the effects of business cycle extremes and nonrecurring items.

From Reported Figures to FCFF and FCFE

In practice, you often start from net income or CFO and adjust to obtain FCFF and FCFE.

From CFO:

\text{FCFF} = \text{CFO} + \text{Interest expense} \times (1 - \text{tax rate}) - \text{Fixed capital investment}

\text{FCFE} = \text{CFO} - \text{Fixed capital investment} + \text{Net borrowing}

These relationships highlight why:

Net income is a poor proxy for FCFE (it ignores capex, working capital investment, and net borrowing).
EBITDA is a poor proxy for FCFF (it ignores taxes and investment in working and fixed capital).

When forecasting FCFF and FCFE:

Tie capital expenditures and working capital investments to revenue growth and capacity needs.
Reflect target leverage by modeling net borrowing as a proportion of net investment in working and fixed capital.
Remove the effects of transitory items (e.g., large asset disposals, legal settlements) from the base year.

Worked Example 1.5

Meyer Ltd. reports the following for the current year (in $ millions):

Net income: 120
CFO: 150
Interest expense: 30
Tax rate: 30%
Net capital expenditures (capex − depreciation): 80
Net borrowing (new debt − repayments): 20

Compute FCFF and FCFE and comment on the relation between them.

Answer:
From CFO:

FCFF
$= 150 + 30(1 − 0.30) − 80$
$= 150 + 21 − 80 = 91$

FCFE
$= 150 − 80 + 20 = 90$

FCFF is slightly higher than FCFE, as expected, because FCFF is before financing costs, while FCFE reflects the net cash effect of debt financing. Both figures are close, indicating that net borrowing is modest relative to after‑tax interest and capex. For valuation, either FCFF or FCFE could be used, provided the discount rate and ownership view are consistent.

Adjusting for Nonrecurring Items

Forecast cash flows should be based on earnings that exclude nonrecurring items.

Worked Example 1.6

Alpha Corp. reports net income of $50 million, with$ 10 million in nonrecurring restructuring gains included. CFO is $60 million, including a$ 5 million cash inflow related to the restructuring. Calculate adjusted net income and adjusted CFO for use in a DCF model and explain the rationale.

Answer:
Adjusted net income
= $50 − 10 = 40$ million (removing the nonrecurring gain).

Adjusted CFO

= $60 − 5 = 55$ million (removing the restructuring‑related cash inflow).

These adjustments ensure that the starting point for projected cash flows reflects only sustainable earnings and cash flows from core operations. Including the one‑off gain and related cash inflow would overstate ongoing profitability and could lead to an overvaluation in a DCF model.

Classification Issues and Comparability

Under U.S. GAAP, interest paid, interest received, and dividends received are classified as operating cash flows, whereas under IFRS:

Interest paid can be operating or financing.
Interest and dividends received can be operating or investing.

This flexibility allows some scope for managing reported CFO. For comparability:

When analyzing multiple IFRS firms, check whether classification choices change over time, especially around covenant tests or performance targets.
When comparing IFRS and U.S. GAAP firms, consider reclassifying interest paid or received to a consistent category (commonly financing for interest paid) for analytical purposes.

Similarly:

Cash flows from sale of trading securities are operating, while sale of available‑for‑sale or other debt investments are investing.
Designation of securities may therefore affect CFO even when economic exposure is similar.

For valuation, the focus should be on total free cash flow, not just reported CFO.

Summary

Earnings quality and cash flow modeling are essential for industry and company analysis in the CFA Level 2 curriculum. Analysts must:

Distinguish persistent, core operating earnings from transitory or manipulated items.
Understand the role of accruals and use accruals ratios—especially those based on net operating assets—to assess the reliability and persistence of reported profits.
Recognize that accrual‑heavy earnings tend to mean‑revert faster and are less valuable than cash‑based earnings.
Evaluate the quality of operating cash flows, looking for alignment with earnings, sustainable sources, and adequate coverage of investment and financing needs.
Translate reported earnings and cash flows into FCFF and FCFE, adjusting for nonrecurring items and aggressive accounting choices, to obtain normalized inputs for valuation models.
Incorporate these findings when comparing firms across industries, assessing credit risk, and answering exam-style case questions that demand both calculation and interpretation.

Key Point Checklist

This article has covered the following key knowledge points:

Assessing the persistence, sustainability, and adequacy of company earnings relative to the cost of capital.
Distinguishing cash and accrual components of earnings and interpreting accruals ratios as earnings quality signals.
Understanding balance‑sheet‑based and cash‑flow‑based accruals ratios using net operating assets.
Recognizing earnings management tactics and financial reporting red flags in revenue, expenses, reserves, and fair value estimates.
Evaluating how capitalization policies, pension and share‑based compensation assumptions, and one‑off items affect both earnings and cash flows.
Assessing cash flow quality by analyzing CFO trends, working capital patterns, and classification choices under IFRS and U.S. GAAP.
Modeling and interpreting operating, free, and discretionary cash flows (including FCFF and FCFE) for valuation and credit analysis.
Adjusting historical and forecast cash flows for nonrecurring items and accounting distortions to derive normalized earnings and cash flows.
Integrating earnings quality and cash flow findings into industry and company comparisons and valuation decisions.

Key Terms and Concepts

earnings quality
persistence
nonrecurring items
accruals
operating cash flow (OCF)
accruals ratio
net operating assets (NOA)
cash flow from operations (CFO)
mean reversion
earnings management
free cash flow (FCF)
free cash flow to the firm (FCFF)
free cash flow to equity (FCFE)
discretionary cash flow
core earnings
normalized earnings

Industry and company analysis - Earnings quality and cash fl...