Normalized earnings definition
/What are Normalized Earnings?
Normalized earnings are an organization’s reported profits, adjusted to remove the impact of seasonality, as well as unusual revenues and expenses. For example, a business might strip out the one-time gain caused by winning a lawsuit, since it does not reflect the operational capabilities of the organization. Other events that might be stripped out of reported earnings are gains or losses from the sale of fixed assets, losses from adverse weather events, gains and losses from the sale of securities, losses from asset impairments, and the impact of business units that have been sold since the financial statements were produced. Adjustments to eliminate the effects of seasonality involve the use of a moving average for revenue and operating expenses; doing so dampens the seasonality effect without entirely eliminating it.
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The Interpretation of Financial Statements
How to Use Normalized Earnings
By normalizing earnings, you can gain a better understanding of the performance of a company’s core operations. While the normalization process typically only impacts a company’s income statement, a better approach is to release the entire set of financial statements with these corrections made throughout, so that readers can see the impact on a firm’s financial position and cash flows.
Normalized earnings information is useful for comparisons on a trend line, to see how a company is performing in comparison to its previous normalized results. This information can also be used to compare a firm’s results to the normalized earnings reported by competitors.
Fraudulent Use of Normalized Earnings
The inconsistent application of normalization adjustments to a company’s earnings can be employed to give investors and analysts an excessively rosy view of a company’s results.