Stock Market Analysis: Normalised Earnings and Valuation Methods

This report provides an analysis of the stock market, focusing on normalised earnings and valuation methods. It begins by discussing the concept of normalised earnings, emphasizing the need to adjust for seasonal effects and unusual influences like the global financial crisis, and lists items that need normalisation such as unusual incomes and expenses, tax expenses, restructuring charges, litigation expenses and cost of acquisitions and amortisations. The report then explores the Shiller PE Ratio, which considers inflation and a ten-year average EPS, and highlights its importance in understanding the stock market's affordability. The analysis includes the impact of the global financial crisis, examining how it affected stock prices, company performance, and the need for adjustments in earnings and valuation. The report also includes the impact of the economic crisis on the market, discussing the fall in share prices, home values, and wage rates, along with the impact of company cutbacks. It concludes by emphasizing the necessity of adjusting and normalising the EPS to get the accurate market value. The report concludes with a list of references.

Slide 1
Title Slide
Slide 2

This slide discusses about the suitability of normalised earnings and mentions that in the
long run the financial condition of any organisation does not always remain same.
Slide 3
This ratio is measured in order to provide a picture of the affordability of the stock market at
a particular point of time. This method has also helped in the stock market valuation after the
global financial crisis as it was the only concept that first proposed the time frame of ten
years and targeted towards the S&P 500, which is one of the most well-known stock index of
America.
Slide 4

It helps the investor in understanding the value of the company. It helps in the standardisation
of the stocks that have different price levels and earning levels. The investors selects any
stock on the basis of this ratio because it helps the investors in understanding whether the
stock is providing fair return or not.
Slide 5

Normalized earnings are those earnings where adjustments are made in order to remove
the seasonal effects and other unusual influences (for example the global financial crisis).
These earnings eliminate the non-recurring and the exceptional items from the reported
EPS.
There are several items that are required to be normalised while calculating the normalised
earnings, few of which are other unusual incomes and expenses, tax expenses, the charges
of restructuring, litigation expenses and cost of acquisitions and amortisations. This
normalisation makes it easier to compare between the P/E and the EPS figures.
Slide 6
This ratio takes the impact of inflation on profits under consideration. It also takes under
consideration the ten years average EPS as its denominator along with the consideration of
real value adjustment of inflation. It helps in the elimination of the impact of the sudden
deviations in the stock prices and the EPS.
Slide 7

The global economic crisis had a serious effect on the economy and the share market. The
share prices fell down in the market. The values of the home fell at a huge rate. There was
also a drop in the wage rate of the employees. Many companies entered into company
cutbacks and many employees lost their jobs. There was credit crunch being followed by
the domestic imbalances for example the deficit in the current accounts and the bubbling of
the housing sectors. Australia is an exception in this case as it is the only country that had a
positive growth even at the time of financial crisis.
Slide 8
The Shiller PE Ratio considers all the necessary adjustments in the price level and the
profitability. Similarly the global financial crisis affected the stock market and the profitability

and the EPS of the organisation fell down. The companies performed poor and the market
index got hit badly. Over the years the figures kept on changing. This implies that the rates
and the earning kept on changing and hence the necessary adjustments and normalisation
of the EPS is necessary to get the accurate market value.
Slide 9
Conclusion Slide
Slide 10

Reference Slide
Slide 11