Earnings adjusted to remove cyclical, one-time, or accounting distortions — representing the sustainable through-cycle earning power of a business.
Deeper Explanation
Cyclical businesses earn very different amounts in boom versus bust years. Reported earnings at the top of a commodity cycle can be 5-10x their trough levels. Using peak earnings to value a cyclical business leads to systematically overpaying; using trough earnings systematically underpaying. Graham normalised by averaging earnings over a full business cycle (7-10 years). For non-cyclical businesses, normalisation removes one-time items: restructuring charges, litigation settlements, asset sale gains. The result is a cleaner picture of what the business earns in an average year under average conditions.
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