Cleaning NI is used for calculating which metrics?

Cleaning NI is used for calculating which metrics?

• A. EPS and P/E Ratio
• B. ROE
• C. Free Cash Flow
• D. WACC

Answer: (A)

Removing non-recurring items from net income gives a cleaner view of ongoing profitability. When you calculate earnings per share, you divide the cleaned net income by the number of shares, so EPS reflects sustainable earnings rather than one-time bumps or dips. The price-to-earnings ratio uses that same per-share earnings figure, so it also benefits from a cleaned, normalized net income to avoid distortions from unusual items. Free cash flow and WACC don’t rely on net income per share in the same way: free cash flow comes from cash flow statements (operating, investing, financing activities), and WACC is a capital-cost measure based on market values and required returns, not on cleaned net income. ROE could be adjusted in some analyses, but the specific use case for cleaning NI that affects EPS and P/E is the direct link to earnings per share and its price multiple.

Removing non-recurring items from net income gives a cleaner view of ongoing profitability. When you calculate earnings per share, you divide the cleaned net income by the number of shares, so EPS reflects sustainable earnings rather than one-time bumps or dips. The price-to-earnings ratio uses that same per-share earnings figure, so it also benefits from a cleaned, normalized net income to avoid distortions from unusual items.

Free cash flow and WACC don’t rely on net income per share in the same way: free cash flow comes from cash flow statements (operating, investing, financing activities), and WACC is a capital-cost measure based on market values and required returns, not on cleaned net income. ROE could be adjusted in some analyses, but the specific use case for cleaning NI that affects EPS and P/E is the direct link to earnings per share and its price multiple.