Lesson 1 of 7
What normalising means
An adjustment is a claim that the filing misdescribes the ongoing business. Ten filed years of Cisco operating income show why the claim is often needed.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Normalising means producing the figure the business would report in an average year of its current shape, not the figure it reported in this one.
- Every adjustment is a claim, and the claim has to answer one question: would this item recur in an average year.
- Cisco's operating margin across ten filed fiscal years runs from 20.76 percent to 27.63 percent, so which year you call normal moves the answer by a third.
A single year's earnings answers a question nobody asked: what happened in those twelve months. What a valuation needs is a different figure, the one the business would produce in an average year of its present shape, and no filing reports it.
Cisco operating margin, ten filed fiscal years
- Operating margin
Show the numbers
| Operating margin | |
|---|---|
| FY17 | 24.94% |
| FY18 | 24.95% |
| FY19 | 27.39% |
| FY20 | 27.63% |
| FY21 | 25.76% |
| FY22 | 27.09% |
| FY23 | 26.37% |
| FY24 | 22.64% |
| FY25 | 20.76% |
| FY26 | 24.27% |
The one question every adjustment answers
Would this item appear in an average year of the business as it is now constituted. That is the whole test, and it has three possible answers.
Yes, it recurs: leave it in, even if the company calls it unusual. No, it cannot recur: take it out, and say why it cannot. It recurs but not at this size: replace this year's amount with a figure drawn from the record, and say which years you drew from.
The third answer is the one people skip, and it is the most common correct one.
The burden sits on the adjustment
The filed figure is the default. It was prepared under a standard, signed by officers, and audited. An adjustment says all of that produced a number that misdescribes the ongoing business, which is a strong claim.
So each adjustment needs three things attached to it: the amount, the filing and line it came from, and the sentence that justifies it. An adjustment without all three is not an adjustment, it is a preference.
Why one year is never enough
Cisco's operating margin over ten filed fiscal years has a low of 20.76 percent in fiscal 2025 and a high of 27.63 percent in fiscal 2020. Apply those two margins to fiscal 2026 revenue of 63,325 million dollars and you get operating income of 13,146 million or 17,497 million.
That is a spread of about 4.4 billion dollars produced by nothing except the choice of which year to call normal. No amount of care about the discount rate in a later model recovers from making that choice badly.
What normalising is not
It is not removing everything that made the year bad. A charge is not excludable because it was large or because management called it one-off. The test is recurrence, and a cost that has appeared in eight of the last ten years recurs whatever its label says.
It is also not forecasting. A normalised figure describes the business as it stands using the record that exists. The moment you put a growth rate on it you have left this course and entered a different one.
Check yourself
What question does every adjustment have to answer?
- Was this item unusually large
- Would this item appear in an average year of the business as it is now constituted
- Did management describe it as one-off
Show the answer
Answer: B.
Recurrence is the test. Size and the company's own label are evidence about it, not the test itself.Cisco's operating margin ranged from 20.76 percent to 27.63 percent across ten filed years. Applied to fiscal 2026 revenue, what is the spread?
- About 400 million dollars
- About 4.4 billion dollars, from 13,146 million to 17,497 million of operating income
- There is no spread, because margin is stable
Show the answer
Answer: B.
Revenue of 63,325 million at the two extremes gives those two figures. The choice of a normal year moves the answer more than most later assumptions do.What does an adjustment need attached to it?
- A percentage of revenue
- The amount, the filing and line it came from, and the sentence justifying it
- The approval of the company's auditor
Show the answer
Answer: B.
Without all three it cannot be argued with separately, which is the only thing that makes a normalised figure more useful than the reported one.Sources
- Cisco Systems, Inc., annual reports on Form 10-K for fiscal years 2017 through 2026, filed with the SEC (accession numbers above).
- Graham, The Intelligent Investor, revised edition 1973, chapter 12: reported per-share earnings are shaped by special charges, tax treatment and depreciation choices, so several years averaged are more informative than one year reported.
What this leaves out
- Ten fiscal years is the archive this course reads, not the company's whole history, and a decade may not contain a full cycle for any given business.
- Operating margin here is operating income divided by total revenue as both are reported. It is not adjusted for anything, which is the point of this first lesson.
- Nothing here is a view on Cisco or on any security, and none of it describes what any of these figures will do next.