Analysts calculate Adjusted Net Income for several key reasons, primarily to gain a more accurate and normalized view of financial performance, both for businesses and individuals.
For companies and investors, Adjusted Net Income helps to:
- Remove distortions: by excluding unusual, one-time, non-cash, or extraordinary items (e.g., gains/losses from asset sales, legal settlements, restructuring charges, depreciation, amortization, stock-based compensation). This provides a clearer picture of a company's ongoing, core profitability and financial health.
- Evaluate core strength and long-term prospects: by focusing on recurring earnings, which allows investors to assess a company's sustainable profitability and growth potential.
- Facilitate comparisons: between companies in the same industry or over different periods, as it removes the impact of unique events or accounting differences that can skew reported net income.
- Assess value for acquisition: as potential buyers are interested in a business's worth as an acquired asset, factoring in expenses and income streams that might shift under new ownership.
For individuals (especially in the UK), Adjusted Net Income (ANI) is calculated to:
- Determine tax liabilities: and ensure accurate tax calculations.
- Assess eligibility for tax reliefs, allowances, and benefits: such as the personal allowance, pension contributions tax relief, or the High-Income Child Benefit Charge.
- Aid in financial planning: by helping individuals understand how their income affects their tax obligations and benefit entitlements.