3 ways to identify high-quality earnings

Romano Sala-Tenna, Portfolio Manager at Katana Asset Management, says that many investors are under-appreciating the importance of high-quality earnings. He defines high-quality earnings as being consistent, having a high percentage of recurring revenues, sustainable and transparent, and that the key drivers are within management’s control. He identifies the banks as companies with high-quality earnings. “There’s a small number of large competitors, they act rationally, and the pricing power is with the supplier as opposed to the client. All these things give you confidence in the ability to maintain and predict those earnings.” He suggests three questions you can ask to identify these companies: 1) What have earnings done over the last ten years - are they increasing consistently? 2) Has management been able to predict earnings? 3) Have there been significant one-offs expenses? In the video below he also suggests how to keep an eye out for low-quality earnings.