Normalised Earnings

In addition to the company reported values, we also make use of a 'normalised' eps figure based on Thomson Reuters’ standardised methodology (not just based on management's adjustments).

One off, non-recurring or exceptional items are subtracted from the reported eps figure to give a more accurate depiction of the firm's underlying profitability. This makes it easier to compare the P/E and EPS figures for a company from one year to the next, and across companies.

Companies whose reported and normalised EPS figures are consistently different are considered to have a low 'Earnings Quality'. Management may be in the habit of booking items as 'exceptional' when they are in fact part of their standard business process.

**Normalisation process**

As-reported numbers are adjusted by Reuters by removing all items that are tagged as an 'unusual/one-time/special' item from company figures. They apply the same criteria for determining what is unusual/one-time to all companies they cover. An appropriate tax adjustment is then made to the resulting modified earnings figure.

If the appropriate tax adjustment is provided by reporting companies, it is used for normalised earnings calculations. If the tax adjustment is not provided by companies, then a tax effect is computed.

**Worked Example**

To illustrate this process, let's take the example of Avingtrans where the reported eps (basic/diluted) for 2012 was 3.6p and and the management adjusted EPS is 7.5p, based on adjusting ”to add back amortisation of intangibles from business combinations, share based payment expense and impairment of goodwill.”

In this case, the normalised EPS we show is 5.98p. This is calculated by Reuters as Normalised Net income available to common shareholders divided by Diluted weighted average shares, i.e. 1,578.52/26,378.87 = 5.98p. Normalised Net Income is calculated by adding back the unusual items for the company. For Avingtrans Plc, the only reported item considered unusual in 2012 is 'Impairment of Intangibles’ which is 850,000.

  • Normalised Income Before taxes - 2,085
  • Tax Effect on special items - 506.48
  • Normalised Net Income = (2085 - 506.48) = 1,578.52

The company has taken other items into consideration while calculating the adjusted diluted earnings per share, but those items are non-standard in the view of Reuters' analysts. They therefore choose to disregard such adjustments in order to preserve comparability between companies.

**Calculation Details**

For Industrial, Insurance/Finance and Utility Companies, only the following items are normalised:

  1. Purchased R&D Written-off
  2. Restructuring Charge
  3. Litigation
  4. Impairment-Assets Held for Use
  5. Impairment-Assets Held for Sale
  6. Other Unusual Income/Expense
  7. Loss/(Gain) on Sale of Assets - Operating
  8. Gain/ (Loss) on Sale of Assets
  9. Amortisation of Acquisition Costs

For Banks, only the following items are normalised:

  1. Other unusual income
  2. Restructuring Charge
  3. Litigation Expense
  4. Other Unusual Expense
  5. Amortisation of Acquisition Costs

For all industries, supplemental footnotes are used if an unusual item is reported but cannot be reconciled to the face of the statement.

**Calculating the tax effect**

As discussed above, since special items are often taxed at different rates than ordinary income, Reuters also collect the tax effect of special items from the company reports if those figures are reported. The tax effect of special items is used to calculate the new "normalised" tax number, which is then used in the calculation of the Normalised Income and EPS.

In the case when the company does not disclose this information, the estimated tax effect of special items is calculated. This tax effect calculation is derived using only those special items considered 'taxable' in nature. No related tax effect for Amortisation of Acquisition Costs or Purchased R&D Written-off is assumed.