The earnings persistence ratio measures how consistently a company’s profits sustain over time. It helps evaluate the quality and reliability of reported earnings. A stable ratio generally indicates predictable financial performance and reduced volatility.
The Earnings Persistence Ratio (EPR) quantifies how consistent a company’s earnings remain year after year. It helps investors, analysts, and auditors evaluate the reliability of reported profits.
Eₜ = α + β × Eₜ₋₁ + ε
Where:
Eₜ = Earnings in the current period
Eₜ₋₁ = Earnings in the previous period
α = Constant term
β = Coefficient of earnings persistence
ε = Error term (unexplained variation)
β ≈ 1: High persistence — indicates that profits tend to follow historical trends.
β < 1: Moderate persistence — earnings fluctuate moderately.
β < 0: Negative persistence — profits may reverse, indicating volatility or instability.
Essentially, the closer β is to 1, the more sustainable and predictable a company’s earnings are considered to be.
While earnings persistence focuses on consistency, earnings quality assesses the credibility and accuracy of reported earnings.
Earnings quality reflects whether profits are derived from core operations or influenced by non-recurring items like asset sales, accounting adjustments, or temporary market effects.
Driven by recurring revenue streams.
Supported by strong cash flow.
Follow conservative accounting practices.
Influenced by aggressive accounting or one-time gains.
Show large swings due to revaluations or provisions.
Lack alignment with cash flow trends.
Insight:
A company can have persistent earnings that are low-quality if those profits come from non-sustainable activities. Hence, persistence and quality must be analysed together.
Here’s how earnings persistence interacts with earnings quality to assess profit sustainability:
| Aspect | Earnings Persistence | Earnings Quality |
|---|---|---|
| Focus |
Stability of profits over time |
Reliability of profit sources |
| Measure |
Regression-based β coefficient |
Ratio and qualitative assessment |
| Objective |
Predict future earnings potential |
Evaluate accuracy of current earnings |
| Typical Scenario |
Stable earnings from core business |
Genuine, cash-backed profits |
In essence, high persistence with high quality indicates sustainable profitability. Low persistence or poor-quality earnings often signal short-term, volatile performance.
Let’s assume a firm’s earnings data over three years:
| Year | Earnings (₹ crore) |
|---|---|
| 2022 |
100 |
| 2023 |
110 |
| 2024 |
112 |
Using regression analysis:
Eₜ = α + β × Eₜ₋₁ + ε
Suppose the calculated β = 0.95.
The company’s earnings are highly persistent — each year’s profits closely follow the previous year’s trend.
This indicates a relatively stable earnings pattern, assuming no major external disruptions.
Conversely, if β = 0.4, it would indicate weak persistence, implying that profits are more sensitive to short-term conditions or managerial changes.
Earnings persistence is an important analytical measure of how consistently a company can maintain its profit performance over time. It helps investors and analysts distinguish between sustainable earnings and temporary gains, adding depth to financial analysis.
Earnings persistence evaluates whether current profits will likely continue.
It complements earnings quality, ensuring reported profits are both stable and genuine.
A β coefficient near 1 indicates strong persistence and relatively stable earnings performance.
Persistent earnings are commonly analysed in valuation models, credit risk studies, and financial forecasting.
However, analysts should always cross-check persistence with other indicators like cash flow trends and accounting consistency.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Earnings persistence reflects the statistical consistency of a company’s profits over time, while earnings sustainability indicates the firm’s practical ability to maintain its current level of earnings in future periods. Persistence focuses on stability, whereas sustainability relates to long-term viability.
In earnings persistence analysis, the β coefficient measures the degree to which current earnings depend on past earnings. A coefficient value closer to 1 suggests high persistence, indicating that profits are stable and predictable over successive periods.
Earnings quality evaluates the accuracy and reliability of reported profits, ensuring they reflect genuine business performance. Earnings persistence, in contrast, measures the consistency of these profits over time. Both concepts together help assess a company’s long-term financial strength.
Earnings persistence is widely analysed in equity valuation, credit risk assessment, and earnings management studies. It helps analysts and investors identify companies with consistent profitability and assess the reliability of earnings forecasts.
Anshika brings 7+ years of experience in stock market operations, project management, and investment banking processes. She has led cross-functional initiatives and managed the delivery of digital investment portals. Backed by industry certifications, she holds a strong foundation in financial operations. With deep expertise in capital markets, she connects strategy with execution, ensuring compliance to deliver impact.
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