Quality of earnings

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

Quality of earnings is the question of whether reported profit is real enough to lend against. A profit figure is an opinion assembled by people with incentives; cash is a fact. The test runs three angles in parallel: whether profit converts to operating cash, whether the balance sheet is moving in a direction the profit story explains, and what the language of the disclosure itself reveals. Positive EBITDA alongside negative operating cash flow is not a funding gap — it is a conversion problem, and lending against it does not fix it.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.