Value investing · Course 20 of 39 · Reading a business
Normalising the numbers
Ten filed years of one company, turned into one earnings figure you can defend, with every adjustment written down so another person can disagree with each one.
Every valuation course downstream of this one says the words normalised earnings and moves on. Greenwald's earnings power value needs one. A discounted cash flow needs one. A multiple is meaningless without one. Nobody teaches how to produce it.
This course produces one, on a real company, across ten filed fiscal years, with the accession number of every filing stated. The company is Cisco Systems, chosen because a decade of its annual reports is on file and citable, because it charges something described as unusual in every one of those ten years, and because it made one very large acquisition in the middle of the period. It is not chosen for any view on its shares.
The discipline here is not arithmetic. It is the burden of proof. Every adjustment you make to a filed figure is a claim that the filing is not the best description of the ongoing business, and each claim has to be written down separately so that another person can accept four of them and reject the fifth. A normalised figure that arrives as a single number, with the reasoning inside the analyst's head, is worth less than the reported figure it replaced.
You need accounting-quality and quality-and-returns first.
accounting-standards helps for the lease and pension adjustments.
What you will be able to do
Take ten filed years of one company, produce one defensible normalised earnings figure, and hand somebody a table with one line per adjustment, each carrying the filing it came from, that they can argue with line by line.
What the figure means, not what yours is
Normalising the numbers is 7 lessons on what a figure is actually measuring and where it stops being meaningful. What that figure currently reads for anything in your portfolio is a different question, and this course does not answer it: it computes nothing about a company you named.
Related
- Accounting quality is the course that establishes why a reported figure is chosen rather than measured.
- Normalised earnings for a cyclical uses a normalised figure inside a valuation, where this course stops.
See our methodology for how the product reads a filing and what it refuses to compute.