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Normalizing

The bad news that dropped a company's stock into the value category probably also killed its profit margins, profitability ratios, and its bottom line earnings. Consequently, value investors must look beyond the current problems and evaluate its performance after its underlying problems are fixed. They do that by analyzing historical patterns.

The process of using historical performance to look beyond current difficulties is termed “normalizing.” A normalized operating margin for instance, is the expected margin, when the company has recovered, say two or three years down the road.


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