Income Quality Ratio
Calculate the income quality ratio, a financial metric that measures the cash flow from operating activities relative to the net income of the company.
The income quality ratio provides insights into the quality of a company’s reported earnings. By comparing the cash flow from operating activities to the net income, this ratio helps assess whether a company’s reported profits are backed by actual cash flow. A higher income quality ratio suggests higher earnings quality and a better ability to convert profits into cash flow.
The formula is as follows:
\[\text{Income Quality Ratio} = \text{Cash Flow from Operations} / \text{Net Income}\]A ratio above 1 means reported earnings are backed by at least as much operating cash flow, which is typical for companies with large depreciation charges. A ratio that stays below 1 for several years, for example because receivables or capitalized costs keep growing, is a common warning sign in earnings-quality screens. The ratio loses meaning, and can flip sign, when net income is close to zero or negative.
Also known as: earnings quality ratio, cash flow to net income ratio.
Income Quality Ratio in Python or via the MCP
Install the Finance Toolkit with:
pip install financetoolkit -U
Then call get_income_quality_ratio as shown below.
from financetoolkit import Toolkit
toolkit = Toolkit(
["NFLX", "DIS"],
api_key="FINANCIAL_MODELING_PREP_KEY",
start_date="2021-01-01",
end_date="2025-12-31",
)
toolkit.ratios.get_income_quality_ratio()
Or, after setting up the Finance Toolkit MCP, ask:
How much operating cash flow did Netflix and Disney generate per dollar of net income from 2021 to 2025?
Which returns:
| 2021 | 2022 | 2023 | 2024 | 2025 | |
|---|---|---|---|---|---|
| DIS | 2.7905 | 1.911 | 4.1912 | 2.8099 | 1.4593 |
| NFLX | 0.0767 | 0.4511 | 1.3451 | 0.845 | 0.9242 |
Parameters
get_income_quality_ratio accepts the following parameters.
| Parameter | Type | Description | Example |
|---|---|---|---|
rounding | int | None | The number of decimals to round the results to. Defaults to None, which uses the rounding of the Toolkit (4 unless set otherwise). | 2 |
growth | bool | Whether to calculate the growth of the ratios. Defaults to False. | True |
lag | int | list[int] | The lag to use for the growth calculation. Defaults to 1. | 4 |
compound | bool | Whether the growth is the compound annual growth rate over the lag (e.g. lag=5 for the five-year CAGR) instead of the total change. Defaults to False. | False |
standardize | bool | Whether to standardize (Z-Score) the result. When combined with growth=True, standardizes the growth values instead of the raw values. Defaults to False. | True |
trailing | int | The number of periods to sum flows (income and cash flow statement items) over, with balance sheet items averaged over the same number of period ends. E.g. 4 with quarterly data gives the trailing twelve months (TTM) and 3 with annual data a three-year cumulative figure. Defaults to None, which uses single-period flows (per quarter and not annualized with quarterly data). | 4 |