Normalized EPS

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