Hi folks,
This is the data:
The stock price for Flavia Stores is €26.50.
The question is:
Why is it that the EPS for 2016 is excluded when calculating normalised EPS? Are we supposed to always exclude negative EPS when calculating normalized EPS (via the method of historical average EPS and average ROE) ?
No, you do not typically remove negative earnings from the normalized EPS calculation in either method.
Normalized EPS, either based on historical average EPS, or historical average ROE, are based on the average over the most recent full cycle.
The most likely reason for removing 2016’s negative earnings is because 2016 does not represent the most recent full cycle. Maybe the country that the company operates in just recently entered into a recession, which would explain its sudden and large shift to a negative ROE, or perhaps the industry’s own business cycle is on a downturn.
