Normalized P/E: Valuation for Cyclical Stocks
Normalized P/E explained: why investors normalize earnings for cyclical businesses and how to avoid valuing at peak or trough earnings.
Why normalize earnings?
Cyclical companies have earnings that swing with the economy. Using a single-year P/E can make a stock look “cheap” at peak earnings or “expensive” at trough earnings.
How investors do it (high level)
- Use a multi-year average EPS
- Adjust for one-time items
- Compare to cycle position and balance sheet strength
Many blow-ups happen when investors extrapolate peak earnings. Normalizing helps keep assumptions grounded.
Compare valuation across sectors
Use stock pages and sector views to compare businesses within similar economic cycles.
FAQs
When should I use normalized P/E?▼
When earnings are highly cyclical (commodities, industrials, shipping, some consumer cyclicals).
Is normalized P/E always better?▼
Not always. For stable businesses, standard P/E plus cash flow checks may be sufficient.
Related
Intrinsic Investor is for education and research only. Not financial advice.