How to Calculate Quality of Income

financial report image by PaulPaladin from Fotolia.com

Quality of income ratios are a tool to evaluate a business' earnings performance. The ratio shows the percentage of earnings that have been actualized in cash. A high ratio is desirable because it indicates a large amount of earnings turning into profits. The percentage may be above 100 percent because the ratio doesn't take into account factors, such as replacement of productive assets.

Find the cash flow from operating activities on your financial statement or statement of cash flows.

Find the net income on your financial statement or statement of cash flows.

 

Divide the cash flow from operating activities by the net income to calculate a percentage, which is the quality of income figure.

 

References

Photo Credits

  • financial report image by PaulPaladin from Fotolia.com