What is adjusted EBITDA?
EBITDA strips out financing costs, taxes and non-cash depreciation and amortisation to focus on operating profit. Adjusted EBITDA goes further by removing items management considers unusual or not part of normal trading.
Formula
Adjusted EBITDA = Net income + Interest + Taxes + Depreciation + Amortisation ± Adjustments
Common adjustments
- One-off legal settlements or restructuring costs
- Stock-based compensation
- Gains or losses on asset sales
- Owner's personal expenses run through the business (common in small business valuations)
- Acquisition and integration costs
- Foreign exchange gains or losses
Example
A company reports net income of $200,000, interest of $40,000, tax of $60,000 and depreciation of $50,000, giving EBITDA of $350,000. It also paid $30,000 for a one-time office relocation. Adjusted EBITDA = $380,000.
Uses
- Business valuations, often quoted as a multiple of adjusted EBITDA
- Loan covenants and debt capacity
- Comparing companies with different debt levels and tax positions
Watch-outs
Adjusted EBITDA is a non-GAAP measure. There is no standard definition, and aggressive "adjustments" can flatter results. It also ignores capital spending and working capital needs, so always read it alongside cash flow.