What does normalization refer to in financial statements?

Normalization in financial statements refers to the adjustment of data to remove anomalies or irregularities that can distort a company's true financial performance. This process ensures that the financial information presented is more representative of ongoing operations and better reflects the company's capabilities, allowing investors, analysts, and stakeholders to make more informed decisions.

For example, if a company experiences a one-time event that significantly impacts its earnings, such as a sale of assets or restructuring costs, normalizing the financial statements will involve adjusting for these unusual events to show what the company's earnings would typically appear like. This provides a clearer picture of the company's operational performance over time, facilitating better comparisons with other periods or similar companies.

Understanding this concept is crucial as it helps in evaluating the underlying business health without the distortions that occasional anomalies can introduce into financial metrics.