Adjusted EBITDA
→ Use the Adjusted EBITDA CalculatorWhat 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
| 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
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.