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 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.

Financial data sites publish their own normalized figures, such as normalized net income and normalized EPS, which typically remove unusual items like asset writedowns, restructuring charges and gains or losses on selling investments. Some providers also apply a standard tax rate instead of the company's own, which can put normalized figures well below the reported ones. Each provider applies its own definition, so check how a normalized figure was built before comparing it with reported results or across sources.