About Brian DeChesare
Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.
In this tutorial, you will learn why non-recurring charges matter, how they impact a company’s financial statements and valuation, and how to find them and adjust for them in a financial statement analysis and valuation.
A common question we get is “How do you adjust for non-recurring charges when valuing and analyzing companies?”
There’s a ton of confusion around this question, which is made even worse by the fact that non-recurring charges RARELY make a huge difference in models and valuations.
Because they could throw off financial statement analysis and multiples such as EV / EBITDA in the historical period.
Example: A company records a big write-down or a big Gain or Lossナ is that item really representative of the company’s ongoing, recurring business activities? NO!
Example for Alcoa: The big Goodwill Impairment charge of $1.7 billion really throws things off in Year 2, so we should consider adding it back when calculating metrics like EBIT and EBITDA.
Butナ does this really matter for valuation / financial modeling / analytical purposes?
I would say, “No” because it’s not in the most recent period – and normally you focus on the LTM or Last Fiscal Year figures when calculating valuation multiples.
So you care more about very recent or anticipated non-recurring charges.
Easy Method: Look at the Income Statement and the Cash Flow Statement and search for anything that might be “non-recurring,” i.e. it does not appear in every year
It does NOT matter whether an item is cash or non-cash – all that matters is whether or not it impacts the metric you are calculating, such as EBIT or EBITDA.
Companies will often, though not always, list major non-recurring items on the IS and CFS. Examples for Alcoa:
Goodwill Impairment: This is clearly a non-recurring charge that should be added back, since it appears in only one of six historical years.
Restructuring: We are NOT adding back Restructuring because it’s effectively a recurring item here.
Stock-Based Compensation, Provision for Doubtful Accounts, etc.: These are non-cash items, but they’re also very much recurring items, so we do not add them back.
Gains and Losses: We might add these back, but need to determine where they appear on the Income Statement first.
Anything Else: Other charges might exist as wellナ we need to do some detective work to find them, time permitting.
If you have the time or need a lot more detail, you can sift through the Notes to the Financial Statements and look up possible non-recurring charges in each section.
COGS: A few write-downsナ but are they non-recurring? We would say, “no.”
Other Income: Gains from CFS appear there – so we don’t add these back since they don’t impact EBIT or EBITDA at all.
Restructuring: Could make the case that the Loss is non-recurringナ but even that is debatable. In this case, however, we will add back the “Loss from Divestiture” portion.
The Restructuring Charge is on pg. 107 of the 10-K and the Gains and Losses are on pg. 133 of the 10-K.
You don’t “adjust” the historical statements themselves – only metrics like EBIT, EBITDA, etc.
Criterion #1: Is it really non-recurring? Really? HAS NOTHING TO DO WITH CASH VS. NON-CASH!
Criterion #2: Does it actually impact the metric you are adding it back to?
Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys lifting weights, running, traveling, obsessively watching TV shows, and defeating Sauron.