Adjusted EBITDA Vs EBITDA Explained: What’s The Difference?
What Does EBITDA Mean?
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. This is the formula companies use to calculate EBITDA:
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
EBITDA removes financing choices, tax rules, and non-cash expenses. The goal is to show profit from core operations.
Investors like EBITDA because it helps compare companies with different debt levels or tax rates.
According to this Flippa report, EBIDTA remains the cornerstone of private equity valuation since it accurately shows the true performance of a company.
That being said, EBITDA works best when:
You are comparing similar companies
You are tracking operating trends over time
You want a quick view of cash-generating ability
However, EBITDA has limits. It tends to ignore capital spending and working capital needs. A company can show strong EBITDA and still struggle to pay bills.
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What Does Adjusted EBITDA Mean?
Adjusted EBITDA starts with EBITDA and then adds or removes extra items. There is no fixed formula to calculate this metric.
Companies usually adjust EBITDA by excluding the following:
Stock-based compensation
Restructuring costs
Legal settlements
Acquisition costs
One-time gains or losses
The idea behind this metric is to show earnings from “normal” operations.
For example:
If a company spends $2 million on a one-time lawsuit, management may remove that cost from EBITDA and call the result adjusted EBITDA.
According to guidance from the U.S. Securities and Exchange Commission, companies must clearly explain all adjustments because adjusted EBITDA is a non-GAAP metric. The SEC warns that unclear adjustments can mislead investors.
Adjusted EBITDA reflects how management wants investors to see performance. That can help, but it can easily hide real costs.
Adjusted EBITDA Vs EBITDA: Side-by-Side Comparison
Here is a quick table showing the key differences between the two metrics:
Aspect | EBITDA | Adjusted EBITDA |
How it’s calculated | Uses a standard formula | Uses company-defined adjustments |
Consistency | More consistent across companies | Varies from business to business |
Comparability | Easier to compare different companies | Harder to compare due to different adjustments |
Treatment of operating costs | Includes all operating costs (before interest, taxes, D&A) | Excludes selected expenses based on management judgment |
Flexibility | Rigid and formula-driven | Flexible and judgment-driven |
Main Advantage | Objectivity and comparability | Shows what management believes is “true” ongoing earnings |
Main Risk | May understate normalized earnings if unusual costs occurred | Can overstate earnings if adjustments are aggressive |
EBITDA answers this question: “How much profit did the core business generate before financing and accounting rules?”
Adjusted EBITDA answers this question: “How much profit would the business generate if certain costs did not exist?”
Both answers can matter, just that they solve different problems.
Why Do Companies Prefer Adjusted EBITDA?
Companies often promote adjusted EBITDA because it usually looks better.
A 2022 study published by the CFA Institute found that over 90% of S&P 500 companies use at least one non-GAAP metric in earnings reports. Adjusted EBITDA ranks among the most common.
Here are the usual reasons:
To remove unusual costs during growth or restructuring
To show profitability earlier for startups
To align metrics with debt covenants
For early-stage or fast-growing companies, adjusted EBITDA can help explain short-term losses. For mature companies, repeated “one-time” adjustments can raise red flags.
When Is Adjusted EBITDA Considered Risky?
Adjusted EBITDA becomes risky when adjustments repeat every year.
If stock compensation, legal costs, or restructuring charges keep showing up, they stop being unusual. They become part of how the business runs.
The SEC has taken enforcement actions against firms that presented adjusted EBITDA more prominently than GAAP earnings without clear explanations. This reinforces one rule: adjustments need context.
A simple test helps in this case: If a cost keeps happening, you should treat it as real.
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E-commerce Simplified for Busy Individuals – We handle the buying, building, and scaling, so you can focus on what matters.
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How Should You Use These Metrics?
If you are a founder:
Use EBITDA to understand operational strength
Use adjusted EBITDA to explain short-term noise
Document every adjustment clearly
If you are an investor:
Start with EBITDA
Review each adjustment line by line
Ask if excluded costs will return
Banks and private equity firms often value companies using both metrics. Debt agreements may rely on adjusted EBITDA, but valuation models often lean on standard EBITDA for consistency.
Here’s A Practical Example of The Two Metrics In Use:
Company A reports:
EBITDA: $10 million
Adjusted EBITDA: $14 million
The $4 million difference comes from:
$2 million stock compensation
$1 million legal fees
$1 million restructuring costs
If those costs repeat next year, adjusted EBITDA loses credibility. EBITDA stays comparable.
This example shows why adjusted EBITDA needs scrutiny.
EBITDA Vs Adjusted EBITDA Frequently Asked Questions:
Here are some commonly asked questions on EBITDA and adjusted EBITDA as used in business valuations:
Is adjusted EBITDA a good metric?
Adjusted EBITDA can be a useful metric when evaluating a company’s normalized operating performance, especially in private company valuations. It helps remove one-time, non-recurring, or discretionary expenses to reflect sustainable earnings. However, it is only as reliable as the adjustments made. Aggressive or unsupported add-backs can distort true profitability and mislead investors.
What is another name for adjusted EBITDA?
Adjusted EBITDA is often referred to as normalized EBITDA. In some transactions, it may also be called pro forma EBITDA or run-rate EBITDA, depending on the nature of the adjustments. While the terminology varies, the intent is similar: to present earnings that reflect ongoing, sustainable operating performance rather than reported historical results.
What is the difference between EBITDA and EBIT?
EBITDA excludes depreciation and amortization, while EBIT includes them. Both exclude interest and taxes. EBIT reflects operating profit after accounting for non-cash depreciation and amortization expenses, making it closer to accounting earnings. EBITDA removes those non-cash charges to focus more directly on operating cash flow potential.
What is excluded from adjusted EBITDA?
Adjusted EBITDA typically excludes non-recurring, unusual, or discretionary expenses. Common exclusions include one-time legal settlements, restructuring costs, non-operating income or losses, excess owner compensation, and personal expenses run through the business. The goal is to remove items that are not expected to continue under normal operations.
Is adjusted EBITDA better than EBITDA?
Adjusted EBITDA is not inherently better, but it can be more relevant for valuation when adjustments are reasonable and well-supported. EBITDA offers consistency and comparability across companies. Adjusted EBITDA aims to show sustainable earnings power. The usefulness of either metric depends on context and the credibility of the underlying assumptions.
Final Takeaway
EBITDA gives you a clean, standard view of operating profit, while Adjusted EBITDA shows how management frames performance after removing selected costs. Neither metric is perfect. EBITDA can ignore real cash needs, while Adjusted EBITDA can hide real expenses. In conclusion, we advise you to use EBITDA for comparison and adjusted EBITDA for context. Trust neither without reading the details. If you treat adjusted EBITDA as a story and EBITDA as the facts, you will make better decisions.
Overall, understanding EBITDA vs Adjusted EBITDA helps you evaluate a business’s true earning potential and avoiding overpaying.
For investors looking to acquire a profitable ecommerce business, our Smart Acquisition program provides hands-on support throughout the entire process, from sourcing and evaluating deals, performing due diligence, negotiating terms, and closing the acquisition, to scaling the business for a profitable exit. Partnering with experts ensures you make informed, confident decisions at every step.
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