Description
Adjusted EBITDA measures a company’s earnings before deducting interest expense, tax expense, depreciation & amortization expenses and also adjusting extraordinary and non-recurring expenses like legal fees, impairment of assets, gain/loss on the sale of a capital asset, etc.
Example
To begin, companies can calculate standard EBITDA by using their net income figures. Net income will include interest, taxation, depreciation, and amortization expenses. Once these expenses are added back to the net income, companies can derive the EBITDA figure. To calculate Adjusted EBITDA - add any one-time non-recurring expense item that does not occur regularly. Examples include litigation fees, special donations, etc. These could also include unique expenses that are usually not incurred by peer companies. Adding back all these unique and one-off items to EBITDA will give us Adjusted EBITDA.
Why it matters
Adjusted EBITDA allows a company to normalize its reported results. This calculation is especially useful for a business which may incur one-off expenses (for example employee stock options given to employees or legal fees, etc). By taking off such expenses from the earnings calculation, a company can show relevant results since these expenses are not out-of-pocket negative cash flows for the business.