How do you value a company? It produced fifty million in profits this year, will lose twenty million next year, and probably make over one hundred million the following. Weird earnings streams cause valuation predictions, so the Abnormal Earnings Valuation Model relies on book value more predominantly than prognosticated future earnings when making those calculations. Future earnings are taken into account in the Valuation Model via the Discounted Cash Flow Method (or DCF Method), but the WACC Model, or Weighted Average Cost of Capital Model, is replaced with some dartboard driven estimation of the cost of the firm's equity.
The goal here lies in trying to figure out whether or not company management did a good job deploying the scarce resource of their own capital as they ran the business. So many vagaries exist, however, in the numbers applied to derive a conclusion using this method, that many professionals would prefer the BDD Method, which requires the deployment of a blindfold, a donkey, and a dartboard.
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Finance: What are normalized earnings?5 Views
Finance allah shmoop what are normalized earnings All right this
is norm or it's supposed to be We just couldn't
get the licensing rights from him So this is our
public domain version of norm from cheers Sorry And this's
normal that's a bell curve Yeah you're in the ebola
abatement business Each year the government spends a few bucks
on you Just keep you alive Is a business in
case Well you know a few hundred million peoples faces
start melting off like you know that scene in indiana
jones you know the good ones so your earnings are
usually here and here and here and here a buck
a buck twelve twenty three twenty four years I'm like
that But then one year after miss malaria's high school
biology class takes a field trip to study monkeys bats
and beetle crap in caves in central ghana Well your
business picks up So this year when the gove is
having to spend a fortune on ebola abatement you were
nine dollars and forty two cents a share And since
world awareness has suddenly shot up the most popular yahoo
search term index that thing well next year you'll still
learn five seventeen to share even though most the ebola
is pretty much gone now But then things quiet down
in life goes back to normal where your earnings are
you know normal and you could plot some kind of
line through them And if someone asked you what normalized
earnings are in your little ebola abatement company well you
could say that your normalized earnings are in about a
buck twenty Well fortunately making out with the nigerian fruit
bat is not normal so you probably don't have to 00:01:40.539 --> [endTime] worry about contracting ebola Ooh
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What is Earnings Quality? Earnings quality refers to a company’s tangible earnings from sales or reduced expenses as a result of management decis...
