Normalized Earnings

What are 'Normalized Earnings'

Normalized earnings are adjusted to remove the effects of seasonality, revenue and expenses that are unusual or one-time influences. Normalized earnings help business owners, financial analysts and other stakeholders understand a company's true earnings from its normal operations. An example of this normalization would be to remove a land sale from a firm's financial statements in which a large capital gain was realized.

BREAKING DOWN 'Normalized Earnings'

Normalized earnings represent a company's earnings that omit the effects of nonrecurring charges or gains. Additionally, normalized earnings can be thought of as a firm's earnings that take into account seasonal or cyclical sales cycles.

Normalized earnings are the most accurate assessment of a company's true financial health and performance. Many companies incur one-off expenses, such as large lawyer fees, or earn one-off gains, such as the sale of old equipment. In both of these cases, even though the costs and revenues are realized and affect the company's short-term cash flow, they are not indications of the company's long-term performance. To analyze the firm, these effects have to be removed.

Examples of Normalized Earnings

The most common form of earnings normalization occurs when expenses or revenues must be removed or sales cycles must be smoothed. When normalizing large, one-off costs or earnings, there are two types of normalization adjustments.

If, for example, a company that owns a fleet of trucks decides to sell the depreciating assets and purchase new ones, both the earnings and the expenses from the sale are removed to normalize its earnings. An accountant or analyst would do this by looking at the company's income statement and removing the money generated from other comprehensive income. It would then remove the operating expense or debt financing used to purchase the new trucks. Another scenario where expenses are removed to normalize a company's earnings is in the event of an acquisition or purchase. When this occurs, the salary, wages and other expenses paid to owners and officers of the company are removed, since they won't be part of the new organization.

The other common scenario involves the normalization of earnings for companies with cyclical sales cycles or seasonality. With situations like this one, earnings are adjusted using a moving average over a number of periods. The simplest form of this is an arithmetic average. If, for example, a company earns $100 in January, $150 in February and $200 in March, and uses a two-month moving average, its normalized earnings would be $125 for February and $175 for March.

  1. Diluted Normalized Earnings Per ...

    A company's profit less one-time earnings, divided by both outstanding ...
  2. Quality Of Earnings

    The amount of earnings attributable to higher sales or lower ...
  3. Accounting Earnings

    The amount of money a company has earned during a given period, ...
  4. Earnings Management

    The use of accounting techniques to produce financial reports ...
  5. Operating Profit

    The profit earned from a firm's normal core business operations. ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. ...
Related Articles
  1. Managing Wealth

    How to Use Earnings Season to Make Better Decisions

    Earnings season reflects the state of the stock market, but also demonstrates how the overall economy is performing.
  2. Personal Finance

    Everything Investors Need To Know About Earnings

    We go over the concepts behind the excitement over the most important figure in the stock market.
  3. Markets

    What are Earnings?

    The amount of profit that a company produces during a specific period, which is usually defined as a quarter (three calendar months) or a year.
  4. Markets

    IBM Stock: An Earnings Case Study

    Learn the main drivers behind IBM's earnings model and why analysts predict a decline in 2016 followed by a strong recovery in 2017.
  5. Investing

    The 5 Types Of Earnings Per Share

    Understanding the many varieties of earnings per share will help investors make informed decisions.
  6. Investing

    Earnings Forecasts: A Primer

    Learn how this key metric is calculated and how it is used to judge market performance.
  7. Investing

    Core Earnings Strip Away "Creative" Accounting

    This metric is an attempt to counteract creative accounting, but it poses its own set of challenges.
  8. Insights

    Is It Time To End Quarterly Earnings Reporting?

    The chorus for removing the quarterly earnings requirement for companies is growing louder. We examine the pros and cons of the issue.
  9. Investing

    The Financial Characteristics Of A Successful Company

    There are many factors that contribute to a profitable business. Find out what they are here.
  10. Investing

    The 5 Types Of Earnings Per Share

    A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
  1. How rapidly can expanding sales reduce a firm's earnings?

    In order to operate and make money, a company must spend money. Revenue - the dollar amount of sales - can be seen on a company's ... Read Answer >>
  2. What is the difference between earnings and revenue?

    Understand how a company makes revenue and how it makes earnings. Learn the difference between revenue and earnings and how ... Read Answer >>
  3. When is earnings season?

    Earnings season is the period of time during which a large number of publicly traded companies release their quarterly earning ... Read Answer >>
  4. What is earnings management?

    Before diving into what earnings management is, it is important to have a solid understanding of what we mean when we refer ... Read Answer >>
  5. What is the difference between earnings and income?

    See how earnings and income are different and when they are used in relation to personal finance versus a business' financial ... Read Answer >>
  6. What is the difference between capital and operating expenses?

    Learn about the types of expenses that a company incurs. Understand the difference between capital and operating expenses, ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center