Normalization

Normalization is the process of adjusting a company's reported figures to strip out items that don't reflect its ongoing, sustainable economics, a one time gain or loss, an unusually large or small year of spending, or a non-cash charge that doesn't cost real cash the way an operating expense does. The goal is a figure that represents what the business would typically look like in a normal period, not whatever happened to show up in the one actually being reported.

Normalized figures matter most before comparing a company across years or against peers, or before using a reported number as the base for a valuation. Valuing a company off an unadjusted figure that happens to include a windfall, or an unusually heavy investment year, produces an estimate that's really valuing an anomaly rather than the business.