Here we have the net income from a company's income statement. I'm thinking, if I could use last year's net income to forecast next year's net income, that would be really useful for me However, I'm wondering what might be included in last year's net income If there was some non-recurring expenses then last year's net income would not be relevant for next year, there would a trend, it would be a one off year So I'm going to want to add back any non-recurring expenses to try to get to a cleaned net income Now that's slightly similar to the calculation of EBIT or EBITDA But with EBIT or EBITDA we also added back any non-core items and non-controlled items Now why is that the case? When you're calculating EBIT, you really want to find the company's core operating profit from its core products You don't want any non-core items or any non-controlled, maybe 25% shareholding in another company However with net income, slightly different I do want to find the company's continuing net income to shareholders But the net income that goes to shareholders will also include net income from non-core items and net income from non-controlled items So we do want to keep those in here, so non-controlled items and non-core are now kept within the cleaned net income And summary line at the bottom just goes to reinforce that. All continuing income regardless of core or control is assessed in net income Only non-recurring items are cleaned So how do we actually clean net income? Well we start by cleaning EBIT; I can see here there is a re-organising charge of 10 So my EBIT of 300 is going to go up by 10 to 310. Now if my EBIT has gone up, that means my profit before tax has gone up from 200 to 210 And if my profit before tax has gone up that means I need to pay some more tax So how much extra tax do we need to pay? Well I take that extra 10 of profit before tax and I apply the tax rate, in this case 30% So there will be an extra tax of 3 I can now calculate the cleaned net income, so I could take profit before tax 210 minus tax (53) to get to net income 157 It's also nice to work out the post tax non-recurring item. Well the pre-tax non-recurring item was 10 I then times that by (1-30%) So that takes off the tax and I'll 10-3 = 7 Now that we've cleaned the tax expense and we've cleaned profit before tax, we could also clean the effective tax rates As it says here "Non recurring items distort the ETR" or Effective Tax Rate To forecast ETR it must be cleaned, reverse out the non-recurring item and recalculate ETR So here we've got the same numbers from the previous slide. I can see the old tax was 50 The old profit before tax was 200 Thus the ETR or Effective Tax Rate is 25% I now clean out the non-recurring items, so profit before tax goes up by 10 to 210, tax goes up from 50 to 53 So I've now got all the figures I need to calculate the new ETR or Effective Tax Rate I take the 53 divided by the 210 profit before tax to give me an ETR of 25.2%