Term · Accounting & Data Quality
Normalized Earnings
In briefNormalized earnings adjust the result for one-off and non-operating effects to show the sustainable earning power. Because the choice of adjustments is judgmental and not standardized, the definition and individual items should always be examined critically.
Definition
Normalized earnings are a result adjusted for one-off, exceptional and non-operating effects, intended to depict the sustainable earning power. Adjusted items include, for example, restructuring costs, disposal gains or impairments. The choice of adjustments is judgmental and not standardized.
How it is calculated
Formula. reported earnings ± one-off and non-operating effects
Why it matters for small caps
For small caps with irregular one-off effects, normalized earnings help to identify the ongoing earning power, but they can be flattered through selective adjustment.
Common misreadings
- Normalized earnings are regarded as an objective figure, even though the scope and choice of adjustments are at management's discretion.
In the process
Frequently asked
What is typically adjusted?
For example restructuring costs, disposal gains, impairments and other one-off or non-operating effects.
Why is caution needed?
Because the scope and choice of adjustments are at management's discretion and the result can be flattered.
How can the quality be checked?
By tracing the adjusted items individually and reconciling them with the reported result.
Related terms
Sources
Primary
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.