What are Normalised Earnings?

In addition to the company reported values, the EPS figure that we use is a 'normalised' eps figure based on the Reuters standardised methodology (not just based on management's adjustments).

One off items, 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 with a code that identifies the item as an 'unusual/one-time/special' item from the earnings figures, and making an appropriate tax adjustment to this 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. 1,578.522/26,378.874 = 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 intangible' which is 850,000.

  • Normalised Income Before taxes - 2,085
  • Tax Effect on special items - 506.478
  • Normalised Net Income = (2085 - 506.478) = 1,578.522

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, which impacts comparability across companies, hence disregarding them.

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:

  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 most special items are often taxed at different rates than ordinary income, our figures also collect the tax effect of special items from the company reports if the company discloses this number. The tax effect of special items is used to calculate the new "normalised" tax number, which is then used in the calculation of the Normalized 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.