Fintech Earnings Quality: PayPal vs Block vs Coinbase
Three major fintechs, three very different approaches to earnings quality. PayPal (8/10) represents conservative accounting, Block (6/10) shows aggressive tendencies with regulatory exposure, and Coinbase (4/10) raises red flags with 0.10x cash conversion. Our 5-pass filing intelligence reveals what standard screeners miss.
Fintech Earnings Quality: PayPal vs Block vs Coinbase
Last Updated: December 28, 2025 Data Currency: Q3 2025 10-Q filings. PYPL | XYZ | COIN
TL;DR: Three major fintechs show a clear spectrum from conservative to aggressive accounting. PayPal (8/10) sets the standard with neutral accounting and declining SBC. Block (6/10) shows aggressive tendencies with $114M in regulatory exposure. Coinbase (4/10) raises red flags with only 10 cents of cash for every dollar of earnings. Our 5-pass filing intelligence extraction reveals what standard screeners miss.
Earnings Quality Comparison (Q3 2025)
| Company | Quality Score | Accounting | Risk Level | Key Hidden Liability |
|---|---|---|---|---|
| PYPL | 8/10 | Neutral | LOW | $3.4B loan indemnification |
| XYZ (Block) | 6/10 | Aggressive | HIGH | $114M tax + AG investigation |
| COIN | 4/10 | Aggressive | HIGH | $515.9B crypto custody |
Source: MetricDuck 5-pass filing intelligence extraction
Analyze these fintechs: MetricDuck extracts hidden liabilities, accounting quality, and risk factors from SEC filings that standard screeners miss. View PYPL Filing Intelligence | View XYZ Filing Intelligence | View COIN Filing Intelligence
What is Earnings Quality and Why Does It Matter?
Earnings quality measures how reliably a company's reported profits reflect its true economic performance. High-quality earnings are backed by cash flow, use conservative accounting, and provide transparent disclosure. Low-quality earnings may look good on paper but don't convert to cash.
Earnings Quality Score Interpretation:
| Rating | Score | What It Means |
|---|---|---|
| Excellent | 9-10 | Conservative accounting, earnings fully backed by cash |
| Good | 7-8 | Neutral practices, reliable earnings |
| Warning | 5-6 | Some aggressive elements, needs scrutiny |
| Red Flag | 1-4 | Aggressive accounting, significant quality concerns |
For investors, earnings quality determines whether the profits you see in headlines translate to real value creation. A company reporting $1 billion in net income with a 0.10x cash conversion ratio is not the same as one with a 1.0x ratio.
PayPal: The Conservative Standard (8/10)
PayPal sets the benchmark for earnings quality in fintech. Our filing intelligence extraction found "neutral" accounting practices with no red flags identified.
Key Findings
| Metric | Value | Assessment |
|---|---|---|
| Earnings Quality Score | 8/10 | Good - Reliable |
| Accounting Aggressiveness | Neutral | No concerns |
| Red Flags Identified | 0 | Clean |
| Material Weakness | None | Clean |
SBC Analysis
PayPal demonstrates disciplined stock-based compensation management:
- SBC Expense (Q3 2025): $278 million
- YoY Change: -7.3% (declining)
- SBC/Revenue: 3.3%
- Assessment: Sustainable
What Sets PayPal Apart: PayPal's SBC expense is declining while peers struggle with dilution. At 3.3% of revenue, SBC is well-controlled compared to the broader tech industry.
Hidden Liabilities
PayPal's main exposure comes from loan portfolio indemnification:
From Our Pass 3 Extraction:
PayPal has $3.4 billion in potential exposure related to indemnification for sold loan portfolios. This represents recourse obligations if loans default beyond certain thresholds.
"The Company has indemnification obligations for certain sold loan portfolios." — PayPal 10-Q, Q3 2025
Additionally, multiple legal proceedings are ongoing:
- Hawaii state lawsuit (settling Q4 2025)
- Securities class action (pending)
- Shareholder derivative actions (stayed)
Accrued liabilities for probable and estimable matters are "not material."
Why PayPal Leads on Quality
- Conservative accounting - No aggressive practices identified
- Cash backs earnings - Normal cash conversion (~1.0x)
- Declining dilution - SBC expense falling, not rising
- Transparent disclosure - No disclosure concerns flagged
- Low overall risk - Risk profile rated LOW
Block (XYZ): The Middle Ground (6/10)
Block (formerly Square) occupies the middle of the quality spectrum. While the business is strong, our analysis found "aggressive" accounting with specific red flags.
Key Findings
| Metric | Value | Assessment |
|---|---|---|
| Earnings Quality Score | 6/10 | Warning Zone |
| Accounting Aggressiveness | Aggressive | Concerns present |
| Red Flags Identified | 1 | SBC capitalization |
| Material Weakness | None | Clean |
Red Flag: SBC Capitalization
From Our Pass 2 Extraction:
Block is capitalizing $9.4 million of share-based compensation expense related to software costs. This practice moves SBC from the income statement to the balance sheet, improving reported operating income while still diluting shareholders.
This is flagged as "aggressive" capitalization policy.
SBC Analysis
Block's stock-based compensation is significantly higher than PayPal:
- SBC Expense (Q3 2025): $309 million (vs. PayPal's $278M)
- Unvested Liability: $2.3 billion
- Assessment: Higher dilution risk
Hidden Regulatory Risk
Block faces two significant regulatory exposures not widely discussed:
From Our Pass 3 Extraction:
- San Francisco Tax Dispute: Significant potential tax exposure of $114 million related to San Francisco gross receipts tax (2020-2024).
"The Company is currently under examination by the City and County of San Francisco for gross receipts tax." — Block 10-Q, Q3 2025
- State AG Investigation: Probable, material, but unquantifiable loss from state Attorneys General investigation into Cash App handling of customer complaints.
The AG investigation is particularly concerning because it's described as "probable" (meaning management believes a loss is likely) and "material" (significant to the financial statements), yet the amount cannot be estimated.
Bitcoin Revenue Quality
Block's revenue mix raises additional quality questions:
| Metric | Value | Implication |
|---|---|---|
| Bitcoin Revenue | 32% of total | High concentration |
| Bitcoin Gross Profit | 3% of total | Low margin contribution |
| Revenue/Profit Gap | 29pp | Revenue quality concern |
Bitcoin contributes nearly one-third of revenue but only 3% of gross profit. This creates volatility without proportional value creation.
Segment Divergence
Block's two segments are moving in opposite directions:
| Segment | Q3 2025 YoY | Trend |
|---|---|---|
| Square | +11.9% | Improving |
| Cash App | -3.3% | Declining |
| Spread | 15.2pp | Diverging |
The Square merchant business is growing while Cash App declines (largely due to Bitcoin revenue volatility).
Coinbase: The Aggressive End (4/10)
Coinbase shows the most concerning earnings quality signals among the three fintechs. Our analysis found "aggressive" accounting with five red flags identified.
Key Findings
| Metric | Value | Assessment |
|---|---|---|
| Earnings Quality Score | 4/10 | Red Flag Zone |
| Accounting Aggressiveness | Aggressive | Multiple concerns |
| Red Flags Identified | 5 | See below |
| Material Weakness | None | Clean |
Five Red Flags
From Our Pass 2 Extraction:
- Low cash conversion ratio (0.10x) - Only 10 cents of cash for every dollar of earnings
- Revenue recognition policies not detailed - Lack of transparency
- Significant increase in Goodwill due to acquisitions - Impairment risk
- Amortization expense not fully detailed by category - Disclosure gap
- No prior period data for several key metrics - Limits trend analysis
The Cash Conversion Problem
Coinbase's most striking red flag is its cash conversion ratio:
Critical Finding:
Coinbase reported $3.2 billion in net income but only $326 million in free cash flow.
That's a 0.10x cash conversion ratio - meaning for every dollar of earnings, only 10 cents converted to actual cash.
Compare this to PayPal's ~1.0x ratio, and the quality gap becomes stark.
Why This Matters:
- Earnings that don't convert to cash can't fund dividends, buybacks, or reinvestment
- The gap suggests potential issues with revenue recognition or working capital
- Investors paying for $3.2B of earnings may not be getting $3.2B of value
Hidden Liabilities
Coinbase's hidden liability profile is the most extreme of the three:
From Our Pass 3 Extraction:
Crypto Custody Exposure: $515.9 billion
"The Company is obligated to securely store all crypto assets and USDC that it holds in custodial products on behalf of customers. As such, the Company may be liable to its users for losses arising from the Company's failure to secure these assets from theft or loss."
While described as "remote" probability, the magnitude is staggering—over 100x the exposures at PayPal or Block.
Additionally:
- $7.275 billion in debt with 2026 maturities approaching
- Cybersecurity incident disclosed (ongoing)
Cash Conversion Comparison
| Company | Cash Conversion | Interpretation |
|---|---|---|
| PYPL | ~1.0x | Normal - earnings backed by cash |
| XYZ | ~0.85x | Some working capital consumption |
| COIN | 0.10x | Alarming - 90% gap between earnings and cash |
Investment Implications
Summary Comparison
| Factor | PYPL | XYZ | COIN |
|---|---|---|---|
| Earnings Quality | 8/10 (Best) | 6/10 (Middle) | 4/10 (Weakest) |
| Accounting Risk | Low | Medium | High |
| Hidden Liabilities | $3.4B | $114M + AG | $515.9B |
| Cash Conversion | ~1.0x | ~0.85x | 0.10x |
| SBC Trend | Declining | Stable | N/A |
| Overall Verdict | Conservative | Caution | Aggressive |
Key Takeaways
-
PayPal represents the conservative benchmark - Neutral accounting, declining SBC, low risk profile. The $3.4B loan indemnification is the main exposure to monitor.
-
Block requires regulatory scrutiny - The $114M tax dispute and AG investigation are material risks not fully reflected in analyst coverage. The "aggressive" accounting flag warrants attention.
-
Coinbase raises fundamental quality questions - The 0.10x cash conversion ratio and $515.9B custody exposure are extraordinary. Investors should demand explanation for why earnings don't convert to cash.
Deep dive into these fintechs: MetricDuck's 5-pass filing intelligence extracts hidden liabilities, accounting quality signals, and risk factors that don't appear in financial screeners.
Methodology
Primary Sources:
- PayPal Q3 2025 10-Q (SEC EDGAR, filed October 28, 2025)
- Block Q3 2025 10-Q (SEC EDGAR, filed November 6, 2025)
- Coinbase Q3 2025 10-Q (SEC EDGAR, filed October 30, 2025)
Data Extraction:
- Pass 2 (Accounting Quality): Earnings quality scores, red flags, SBC analysis
- Pass 3 (Hidden Liabilities): Contingent exposures, litigation, regulatory matters
- Pass 4 (Risk Landscape): Overall risk assessment, competitive position
Limitations:
- Analysis based on quarterly filings only; annual 10-K may provide additional context
- Forward-looking statements in filings are management estimates subject to change
- Market conditions and regulatory environment may evolve
- Earnings quality scores are model-generated assessments, not guarantees
Disclaimer
This analysis is for informational purposes only and does not constitute investment advice. The information is based on SEC filings and our proprietary filing intelligence extraction. Readers should conduct their own research and consult with financial advisors before making investment decisions. Past performance is not indicative of future results. MetricDuck is not a registered investment advisor.
Explore More Earnings Quality Analysis
This article is part of our comprehensive Earnings Quality Hub, which covers cash flow verification, accounting red flags, and quality screening frameworks.
Related earnings quality research:
- Earnings Quality: The Complete Framework — 3-metric framework, sector thresholds, and red flag checklist
- Cash Flow Quality Framework — 3-metric verification system
- AMD's Hidden Cash Quality Advantage — 1.72x cash conversion beats NVIDIA
- The Buyback Illusion — $2.9T in repurchases analyzed
MetricDuck Research
SEC filing analysis and XBRL data extraction