Trading Comps question
Hi all, have some difficulties understanding the adjustments required of these two statements in building a trading comps model.
Statement 1) The 20XX results included a one - time credit to income of $49 million, which was principally attributable to eliminating the remaining state tax net operating loss valuation allowances as a result of the increased likelihood of the Company’s ability to utilize the related net operating loss tax assets.
Statement 2) The sale resulted in a pre-tax gain of $26 million and a loss of $7 million on an after- tax basis.
Question for Statement 1)
Given that it is one-time, the effects of this must be removed. The answer I have states that given that it is after-tax, the amounts would be adjusted against net income. However, given that it is after-tax, EBIT would not be affected.
Just wondering why don't we take the 49 (after-tax) and regross it to get the before tax figure and then adjust it against EBIT?
Question for Statement 2)
Once again this is one-time and the effects must be removed. The answer now states that the effects have to be removed against EBIT and Net Income.
How do I differentiate when would I need to adjust net income only? And when should I adjust against net income AND EBIT?
Many thanks!
Think about what's already below/above EBIT. You're trying to get a normalized EBIT figure so you exclude one time gains/expenses above EBIT. If it's below EBIT, then you don't need to worry about it since EBIT is already excluding it (answer to your Q1).
In Q2, the $26M is above EBIT, so you have to net it out to get normalized EBIT, while the $7M is above Net Income , so you have to net it out to get normalized NI.
To answer Q1 another way, why would I need to get the pre-tax impact to EBIT if I'm just going to net out that same amount anyway?
Thanks for your response. But I would need to get the pre-tax impact in order to get the corrected EBIT to compute EBITDA. Am I right in saying so?
Appreciate your help.
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