What is a Quality of Earnings (QoE) Analysis?
A Quality of Earnings analysis clarifies sustainable EBITDA, uncovers risk, and supports confident decision-making in healthcare transactions.
Editor’s note: This article was updated in January 2026 to reflect current healthcare transaction and financial due diligence considerations.
A quality of earnings (QoE) analysis is a critical component of financial due diligence for healthcare transactions. Its purpose is to provide an objective, defensible view of a company’s true economic performance—separating sustainable earnings from one-time events, accounting distortions, and operational noise.
For buyers, sellers, and advisors alike, a QoE analysis answers a deceptively simple question: How much of this organization’s earnings are repeatable, reliable, and transferable post-transaction?
Why QoE Matters in Healthcare Transactions
In healthcare, reported earnings rarely tell the full story. Provider compensation structures, reimbursement dynamics, payer mix shifts, and operational complexity can materially affect earnings quality—often in ways traditional financial statements do not reveal.
A QoE analysis helps transaction stakeholders:
- Understand the sustainability of EBITDA used to value the deal
- Identify risks that could affect post-close performance
- Separate operational issues from accounting anomalies
- Reduce uncertainty and support informed negotiations
For sellers, a well-executed sell-side QoE can proactively address issues that may otherwise surface late in diligence—protecting enterprise value and credibility. For buyers, a buy-side QoE provides confidence that pricing assumptions reflect economic reality.
What a Quality of Earnings Analysis Evaluates
At its core, a QoE analysis assesses both financial accuracy and operational reality. While the specific scope may vary by transaction, most healthcare QoE analyses focus on the following areas.
1. Sustainability of Earnings
QoE examines whether historical earnings are likely to continue on a go-forward basis. This includes identifying:
- One-time or non-recurring revenues and expenses
- Out-of-period items
- Discretionary or non-operational costs
- Owner or executive compensation adjustments
The result is a normalized EBITDA figure that better reflects ongoing performance.
2. Due Diligence Adjustments
To reflect the ongoing performance of the business, the Quality of Earnings includes due diligence adjustments. Due diligence adjustments are made to reported financials to remove distortions that misstate economic performance for the purposes of a valuation. These may include:
- Accounting errors or inconsistencies
- Related-party transactions
- Unrecorded or underreported liabilities
- Non-business expenses
- Cash-to-accrual adjustments for cash-basis entities
- Discontinued service lines
In healthcare, these adjustments often require close coordination between financial and operational analysis to ensure accuracy. Generally, due diligence adjusted EBITDA reflects “what actually happened” historically from an earnings perspective.
3. Pro Forma Adjustments
Pro forma adjustments normalize earnings to reflect known changes that occurred, or plan to occur during or shortly after the historical period, such as:
- New or ramping providers or locations
- Material reimbursement changes
- Contract renegotiations
- New service lines
- Incremental cost-saving measures yet to be implemented
These adjustments help stakeholders understand what earnings would have looked like under a specific set of conditions.
4. Quality of Revenue in Healthcare
The revenue cash-to-accrual adjustment is a cornerstone of a quality healthcare QoE. Our team evaluates whether reported revenues are accurate, collectible, and reliable by examining:
- Revenue cycle management processes
- Chargemaster adjustments
- CPT-level billing data and utilization trends
- Payer and modality mix shifts
- Cash collections versus gross charges
- Bad debt percentages compared to industry benchmarks
This analysis often reveals operational risks or opportunities that directly affect valuation. Additionally, it helps the user understand what is truly driving the business's earnings, beyond topline revenue.
How QoE Differs from an Audit
Although audited financial statements provide reasonable assurance that financials comply with GAAP, a QoE analysis serves a different purpose.
- Audits are backward-looking, focused on historical compliance
- A QoE is both backward and forward-looking, focused on understanding historical sustainable earnings to project future earnings potential
- Audits follow a standardized scope, while QoE is tailored to transaction-specific risks and priorities
In short, audits confirm accuracy; a QoE evaluates economic reality.
QoE as Part of Broader Financial Due Diligence
A quality of earnings analysis is rarely performed in isolation. In healthcare transactions, QoE often serves as the financial foundation for broader diligence efforts, including:
- Operational assessments
- Revenue integrity and coding reviews
- Provider productivity and compensation analysis
- Regulatory and compliance diligence
Together, these insights help buyers and sellers understand not only what the business has earned, but why—and whether those earnings can be sustained post-close.
When to Consider a QoE Analysis
Healthcare organizations typically pursue a QoE analysis when:
- Preparing for a sale, recapitalization, or partnership
- Evaluating acquisition targets
- Assessing readiness for investment or growth
- Seeking clarity on earnings volatility or performance drivers
- Starting a financial improvement process, as many of the findings of a QoE can directly inform potential financial improvements
Engaging early enables organizations to address issues proactively rather than reactively during a transaction, helping them stay in control of the narrative throughout the sales process.
What to Do Next
📘 Download our latest resources to dive deeper into transaction readiness
💼 Explore our advisory services to see how we support financial due diligence
📅 Talk to a Coker consultant to discuss your specific diligence needs
A well-executed Quality of Earnings analysis provides clarity, reduces risk, and supports confident decision-making, whether you’re preparing for market or evaluating your next investment.
