Quality of Earnings Triangulation.
Is the profit this company reports the kind of profit a bank can lend against?
ONE OF EIGHT · FROM HOW BANKERS THINK · FREE · NO SIGNUP
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
Quality of Earnings Triangulation, from Michael Shang's How Bankers Think, tests reported profit from three independent angles at once — whether it converts to cash, whether the balance sheet is moving at the speed the income statement implies, and what the notes say and choose not to say — and reads the answer from whether the three agree. The redundancy is the point. A company can dress up one angle; dressing up two is hard; dressing up all three while keeping the auditor satisfied is close to impossible. The name borrows a private-equity due-diligence phrase and repurposes it for a lender's question.
// THE PARTS
- 01Profit-to-cash conversion — Operating cash flow over net income across at least five years, read for level, trend and volatility. The trend is the signal; the level is the context.
- 02Balance-sheet velocity — Whether receivables, inventory and payables are accelerating or slowing — margin pressure hides inside slowing velocity before it reaches the income statement.
- 03Disclosure language — What the notes, accounting policies and commentary say, what they have stopped saying, and how the language drifts over time.
RULING When the three angles disagree, bet on the cash flow and the notes.
// BASIS
Developed in chapter 4, Reading the Numbers Behind the Numbers, of How Bankers Think: Inside Commercial Banking's Hidden Curriculum (Michael Shang, Highbank Press, 2026; paperback ISBN 978-1-0672833-0-8), from sixteen years in commercial banking. The definition and the parts above are the author's own, taken from the chapter that develops the framework rather than from the book's appendix. It is a practitioner's framework, set out in print and tested on the case files this site publishes — not a regulatory standard, and not a convention borrowed from a textbook.
The name is borrowed from private-equity and transaction due diligence, where a quality-of-earnings report normalises EBITDA for a buyer; here it is repurposed for a lender's narrower question — can this profit be lent against — and read from three angles at once rather than as one adjusted number.
“The banker’s reading of financials is, in this sense, an exercise in triangulation. Three angles, each tested independently, each capable of catching what the other two might miss.”
Michael Shang, How Bankers Think (Highbank Press, 2026), chapter 4, page 125 of the print edition.
// HOW IT DIFFERS FROM A QUALITY-OF-EARNINGS REPORT
A quality-of-earnings report, in private-equity or transaction due diligence, is prepared for a buyer and ends in one number: EBITDA normalised for non-recurring items, so that a price can be set on it. Triangulation is prepared for a lender and ends in three readings that are deliberately not reconciled — conversion, velocity, disclosure — because the lender's question is not what the business is worth but whether the profit will still be there when the loan is repaid. The report adjusts the number; triangulation tests whether the number can be trusted at all. Where a QoE report exists, a lender reads it with more confidence when the three angles agree with it, and applies the ruling above when they do not.
// READ ALONGSIDE
The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.
- Sloan, R. G., "Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?", The Accounting Review 71(3), 1996, pp. 289–315 — The accrual component of earnings is less persistent than the cash-flow component — the evidence behind reading profit-to-cash conversion as the first angle.
- IFRS Foundation, IAS 7 Statement of Cash Flows — The definition of operating cash flow the conversion angle is measured against.
// WHERE IT SITS
Every framework in the book is a structured way of answering one question — “How do I get my money back, with interest, across cycles?” — through the three questions beneath it. This one serves:
- QUESTION 01 · CREDITWill I get paid back?Cash flows, assets, business model, resilience across cycles.
The framework is developed in chapter 4 of How Bankers Think, Reading the Numbers Behind the Numbers. The short form is in the glossary; the architecture all eight hang from is on the frameworks page.
// WORKED IN
Where this site runs the framework on a file, free and without signup.
// A CASE, READ WITH IT
A composite file — every borrower on this site is constructed — summarised from the page it links to.
Issue 07 is the triangulation run on a listed retailer. Reported profit after tax is up 9 per cent; operating cash flow is down 31 per cent; and the borrower asks its bank club to consent to a larger dividend. The first angle — conversion — already disagrees with the headline. The second — balance-sheet velocity — says where the profit went. The third is three footnotes that, read together, assemble a narrative the income statement inherited rather than earned. The senior read is that a covenant measured on reported EBITDA cannot warn the bank about any of this, and the consent decision has to be made on the cash, not the covenant.
// ON THE IN-TRAY
Six one-minute files on Chapter 4, each call read against a senior banker's. Quality of Earnings Triangulation on the In-Tray →
// THE OTHER SEVEN
This page is the working form. Chapter 4 is where the framework is developed — where it came from, where it breaks, what a senior banker does when it does, and the cases that turn it from checklist into instinct.
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