Normalisation

A multiple is only meaningful if the denominator represents what the business actually earns in a normal year. Normalisation removes items that are genuinely one off: restructuring charges, litigation settlements, disposal gains, impairments, and the costs of the transaction itself.

The discipline is in being consistent and sceptical. Every adjustment must be applied to every peer, or the comparison is broken, and the word non recurring deserves suspicion when it recurs. A company reporting restructuring charges every year for five years is describing its cost base, not an exception.

It also covers items that are recurring but not representative, such as an unusually low tax rate from a one off benefit, or a period of margin distorted by an input cost spike that has since reversed.

For cyclical businesses normalisation goes further and becomes mid cycle earnings: valuing on the average margin across a full cycle rather than whatever the current point of the cycle happens to produce.