Calculating Normalized Earnings: A Guide for Financial Analysis

Estimate a company's normalized earnings.

Normalized earnings are intended to serve as an accurate measure of a company's present financial situation. The up and down cycles of the economy are taken into account when calculating normalized earnings. There is no exact formula for finding a company's normalized earnings, but you can use a few basic statistics to estimate an organization's current level of wealth. Normalized earnings are typically referenced during the sale of a company or business.

Step 1

Refer to the company's most recent financial statement to find its net income before taxes.

Step 2

Add the sum of nonrecurring expenses to the net income from Step 1. Nonrecurring expenses are any unusual expenses from the previous year that are not expected to occur again, include expenses used for damages or emergencies.

Step 3

Add the salary of the company's owner to the total from Step 2.

Step 4

Estimate how much it would cost to have another person or third party organization run the company.

Step 5

Subtract the amount you estimated in Step 4 from the sum you found in Step 3. The total is the approximate normalized earnings of the company or business.