Reading 48: Price multiples - Price to Earnings

Page 417’s example: In the calculation of the P/E, do we ignore the effects of 1. nonrecurring earnings /losses? 2. extraordinary earnings/losses? The book’s example seems to indicate that we ignore (1), but we include the extraordinary earnings/losses.

Someone please help me. Is the inclusion/exclusion on a case-by-case basis only? Or there is a clean cut rule on how to deal with them?

I think for P/E you should not be including extraordinary itmes or non-recurring earings/losses because you want to value P/E based solely on regular steady operations of the company and not the odd gains and losses. I’m not an expert in this area though

That example that I cited seemed to remove the non-recurring but not the extra-ordinary.

which book and which material - CFAI or schweser?

boston_level2_candidate Wrote: ------------------------------------------------------- > That example that I cited seemed to remove the > non-recurring but not the extra-ordinary. you just said the complete opposite above “The book’s example seems to indicate that we ignore (1), but we include the extraordinary earnings/losses.” in general it should be : remove/add non recurring, and ignore ext.

so it sounds like we COMPLETELY IGNORE AND REMOVE/NULLIFY THE extraordinary/non-recurring items? Re: Reading 48: Price multiples - Price to Earnings new Posted by: viktorv (IP Logged) [hide posts from this user] Date: May 15, 2008 10:07AM boston_level2_candidate Wrote: ------------------------------------------------------- > That example that I cited seemed to remove the > non-recurring but not the extra-ordinary. you just said the complete opposite above “The book’s example seems to indicate that we ignore (1), but we include the extraordinary earnings/losses.” in general it should be : remove/add non recurring, and ignore ext. Edited 1 time(s). Last edit at Thursday, May 15, 2008 at 10:07AM by viktorv.

Normalization is very subjective. You and I may not agree on the same item for normalization. I think CFA institute avoids those kinds of questions that require subjective analysis. My opinion is the same for FSA sythesis. CFA exam may not ask subjective analysis. They may ask to restate items such as lease agreement that are less subjective.