Normalised earnings

Earnings adjusted to a sustainable level, removing one-off items and cyclical highs or lows. For a private company, also restating owners' pay and related-party costs to market rates.

Where you will meet it

Normalised earnings appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain the difficulties of estimating cash flow for private firms and the adjustments needed to arrive at normalised earnings
  CFA Level II · Equities

  “Normalised earnings should reflect the ongoing benefit to a buyer: adjust owners' compensation to market rates, remove non-recurring items and discretionary expenses such as personal costs run through the business, restate related-party transactions such as rent paid to an owner at off-market rates, and value non-operating assets such as surplus property separately.”

• Analyse and explain the effect of balance sheet adjustments, normalised earnings and cash flow statement adjustments on a company's financial statements, ratios and overall financial condition
  CFA Level II · Financial Statement Analysis

  “The trap is removing only the losses as one-offs while leaving gains in normalised earnings.”

• Value a private firm using methods based on income
  CFA Level II · Equities

  “Under excess earnings, estimate normalised earnings, subtract the required returns on working capital and fixed assets, capitalise the residual earnings to value intangibles, and add that to the values of working capital and fixed assets.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with N · Glossary