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Updates to StockCentral's Data Normalization
08/13/2007
Based on the recommendations of Ellis Traub (developer of the Investor’s Toolkit and Take Stock line of software, as well as the author of Take Stock), we have updated the data normalization process of the StockCentral Data Service to include the tax impact of non-recurring items. This affects the data reports, SSG data files, Take Stock, and the Stock Screener.
What is Normalization?
If you're not familiar with the concept, normalization is a means of making financial data more usable for analysts. By removing from the data those items which are either unusual or infrequent—referred to as non-recurring items—the remaining data is closer to that which can be relied upon to occur in the future and is therefore more highly regarded by those who try to forecast what will happen going forward.
For example, if a company’s earnings included a profit from the sale of a building or a windfall from the favorable result of litigation, those earnings would have been inflated by those kinds of events—events which don’t happen in the normal course of business. Or, if the earnings were diminished by some unusual expense, such as the cost of an acquisition or a casualty loss, the reduction is likewise not something that would occur in the normal course of business. Data providers can identify and isolate such items and offer normalized data which excludes such items.
What was the problem?
Since those non-recurring or “Special Items” are reported in the income statement above the tax line, those items nearly always affect the income tax paid by the company. Unusual income would result in increased taxes; non-recurring expense, of course, would reduce them.
Prior to this update, the data did not account for the tax impact of these non-recurring events. The income or expenses were removed directly from the Net after Taxes; and the Earnings per Share were calculated from that value. This change now applies the tax impact of those items as well as the items themselves.
Imagine, if you will, you're at the grocery, and the cashier overcharges you $3.00 for the carrots. After the bill comes up, they pay you back the $3.00 overcharge, but forgot to make up the $0.15 difference in the tax that overcharging caused. The normalization removed the non-recurring event, but failed to account for the tax consequences. This correction makes up for that difference in the taxes.
From now on, as a result of this update, you may notice that the normalization process has a reduced effect on your Net after Taxes and, subsequently, Earnings per Share. This will eliminate some of the differences between your data and some of the other data you may be exposed to.
More Improvements
Since we are making an effort to bring you data that is most likely to recur and, thus, most prized by the analysts, we will also provide you with the normalized Pre-tax Profit, and Net Profit, as well as the normalized Earnings per Share.
In addition, we have changed the Shares Outstanding to reflect the Diluted shares rather than the Basic Shares Outstanding. This will allow you to clearly see the effect of changes in dilutive items like options and convertibles, and help you work backwards to convert Net Income to Earnings per Share.
One note: Those who look at Debt/Equity Ratios will see a change due to the effect that the altered number of shares has on how Equity is calculated. However, the trend will of course remain the same; and that is your primary interest in viewing that metric in the Toolkit and Stock Analyst Plus.
New features on the Data Page
We will now provide more data on the StockCentral Data page report to complement the normalization changes:
- Pre-tax Profit both normalized and "as reported"
- Net Income both normalized and "as reported"
- EPS both normalized and "as reported"
- Shares Outstanding normalized and "as reported"
- Taxable Special Items and Non-Taxable Special Items above the tax line
This should give you everything you need to back-calculate the normalized results.
For all other questions...
Visit the
Frequently Asked Questions section of StockCentral.
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