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Adjusted EBITDA

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What is Adjusted EBITDA?

Adjusted EBITDA starts with reported EBITDA and adds back (or removes) items that management and analysts consider non-recurring, non-cash, or unrepresentative of the ongoing business. Common adjustments include restructuring charges, litigation settlements, stock-based compensation, one-time bonuses, gains or losses on asset sales, and the costs of a completed acquisition.

The purpose is to show what normalised, repeatable EBITDA looks like - the number that will recur year after year under steady-state operations. This is what private equity buyers, lenders, and strategic acquirers use to set valuations and determine debt capacity.

Adjusted EBITDA is not defined by GAAP or IFRS, which means companies have significant discretion over what they add back. Two companies with identical reported EBITDA can present very different Adjusted EBITDA figures depending on their adjustment policies.

When to use Adjusted EBITDA

Use Adjusted EBITDA when valuing a business for acquisition, setting leverage ratios in a debt covenant, or benchmarking against peers - provided all parties agree on the definition of adjustments. Always request a full reconciliation from reported EBITDA to Adjusted EBITDA and scrutinise each add-back.

Worked examples for Adjusted EBITDA

This table quickly gives you the overview you need to understand Adjusted EBITDA and its most important comparisons.

Adjustment item	Amount	Direction
Reported EBITDA	$4,200,000	-
+ Restructuring charges (one-time)	$300,000	Add back
+ Stock-based compensation	$150,000	Add back
− Gain on asset sale (non-recurring)	$200,000	Remove
Adjusted EBITDA	$4,450,000	-

Common pitfalls

Adjusted EBITDA is one of the most abused metrics in corporate finance. Companies under acquisition pressure often classify ordinary recurring costs as "non-recurring." Always stress-test each adjustment: if the cost will realistically recur next year, it should stay in EBITDA. An Adjusted EBITDA that is materially higher than reported EBITDA over multiple years is a red flag.

Frequently asked questions about Adjusted EBITDA

Is Adjusted EBITDA always higher than EBITDA?

Usually, but not always. Most adjustments add items back (increasing the figure), but some adjustments remove non-recurring gains, which can lower it. The net direction depends on the specific adjustments in a given period.

Is stock-based compensation always added back in Adjusted EBITDA?

Often, but it is controversial. SBC is a real economic cost to shareholders (dilution) even though it is non-cash. Many sophisticated investors adjust EBITDA to exclude SBC add-backs to get a more conservative view of profitability.

What is the difference between Adjusted EBITDA and Run-Rate EBITDA?

Run-Rate EBITDA annualises a partial-year EBITDA figure - for example, multiplying Q1 EBITDA by four. Adjusted EBITDA removes non-recurring items from the historical figure. Both are adjustments to reported EBITDA but for different purposes.

Test your knowledge

Quiz: how well do you know Adjusted EBITDA?

5 questions · ~2 min

1. What is the primary purpose of Adjusted EBITDA?

ℹ Adjusted EBITDA starts with reported EBITDA and adds back or removes items management considers non-recurring, non-cash, or unrepresentative. The goal is to reveal what EBITDA will look like year after year - the normalised figure buyers, lenders, and acquirers use for valuation and debt capacity analysis.

2. Using the worked example (Reported EBITDA $4,200,000 + $300,000 restructuring + $150,000 SBC - $200,000 asset sale gain), what is Adjusted EBITDA?

ℹ $4,200,000 + $300,000 + $150,000 - $200,000 = $4,450,000. Add-backs increase the figure; removing the non-recurring asset sale gain reduces it. The net result is a $250,000 increase over reported EBITDA.

3. Which parties primarily use Adjusted EBITDA to set valuations and determine debt capacity?

ℹ The definition states that private equity buyers, lenders, and strategic acquirers use Adjusted EBITDA to set valuations and determine how much debt a business can service. It is the normalised profitability figure that represents the business under steady-state operations.

4. What does the pitfalls section identify as a red flag in Adjusted EBITDA reporting?

ℹ An Adjusted EBITDA that is materially higher than reported EBITDA over multiple years suggests recurring costs are being classified as non-recurring. If a cost will realistically recur next year, it should remain in reported EBITDA rather than being added back.

5. Why is stock-based compensation (SBC) a controversial add-back in Adjusted EBITDA?

ℹ SBC is non-cash, which is the standard justification for adding it back. However, it dilutes shareholders and is therefore a real economic cost. As the FAQ notes, many sophisticated investors exclude SBC add-backs to get a more conservative view of profitability.