Normalized EPS

CFA Level I
#1

How to calculate normalized eps? any help?

#2

Hi. You are asking level 2 stuff man. Here you go. Normalized earnings per share over most recent full business cycle - Historical average EPS: Good for stable book value - Average return on equity: Average ROE * current BV of equity per share  Good for company size over time. Year 2004 2005 2006 2007 EPS $4.00 $3.80 $5.25 $4.50 BVPS $25 $26 $26 $28 ROE 15% 15% 21% 16% - Historical average EPS method: 4.39 - Average ROE method: 16.75% (Average ROE) × BVPS2007 (28.00) = 4.69

#3

Normalized EPS is generally used when the EPS is -ve and firm wants to calcualte the P/E ratio…since a -ve P/E ratio is not meaningful, we calcualte the ROE over a period of time say 5-10 years…and then multiply with the present Book value of the company to get the reliable estimate of the EPS and then compute the P/E ratio The above example by elcfa would provide the clear picture… Thanks!

#4

I’ve also seen ROE be averaged over the last full business cycle.

#5

thanks