Adjusted EBITDA removes one-time costs and unusual items to show what a company's operating profit would look like under normal conditions

Adjusted EBITDA takes standard EBITDA and removes expenses or income that don't happen regularly. A company might strip out a lawsuit settlement, a building sale, severance from layoffs, or stock-based compensation — anything that distorts the picture of what the business actually earns from its core operations in a typical year.

The goal is to show investors and lenders what the company would earn if nothing unusual happened. Standard EBITDA includes these one-time items, so adjusted EBITDA often looks higher. There is no single rule for what counts as "unusual," which means different companies adjust for different things, and the same company might adjust differently from year to year.

Key Takeaways

  • Adjusted EBITDA removes one-time or non-recurring expenses and income from the standard EBITDA calculation to reflect normal operating performance.
  • Common adjustments include legal settlements, asset sales, restructuring costs, stock-based compensation, and acquisition-related expenses.
  • There is no standard rule for what qualifies as an adjustment, so companies have discretion in what they remove, which can make comparisons between companies difficult.
  • Adjusted EBITDA is higher than standard EBITDA when one-time costs are removed, but lower when one-time income is removed.
  • Lenders and investors use adjusted EBITDA to assess debt capacity and operating performance, but should compare it against standard EBITDA to see what was excluded.

Common adjustments companies make to EBITDA

A company filing financial statements will list its adjustments in the footnotes or in a reconciliation table that shows how it moved from standard EBITDA to adjusted EBITDA. The most frequent adjustments include severance and restructuring costs (when a company lays off workers or closes a facility), legal and settlement expenses (lawsuits, regulatory fines), and gains or losses from selling assets (a building, a subsidiary, equipment).

Stock-based compensation — the value of shares or options given to employees — is another common adjustment. So are acquisition costs (the fees and expenses of buying another company) and impairment charges (when an asset on the balance sheet loses value and must be written down). Some companies adjust for currency losses, insurance recoveries, or changes in accounting methods.

The company decides which items to adjust for. There is no regulatory body that says "these seven things must be removed." This discretion is why adjusted EBITDA can vary widely between companies in the same industry, and why it is important to read the footnotes and see exactly what was excluded.

Why lenders and investors look at adjusted EBITDA

Banks and private equity firms use adjusted EBITDA to measure how much debt a company can safely carry. They calculate the ratio of debt to adjusted EBITDA — often called leverage — to decide whether to lend money or invest. A company with $10 million in debt and $5 million in adjusted EBITDA has 2x leverage; one with $10 million in debt and $10 million in adjusted EBITDA has 1x leverage. Lower leverage usually means lower risk.

Investors also use adjusted EBITDA to compare companies. If two software firms both report standard EBITDA of $20 million, but one adjusted EBITDA down to $15 million and the other to $18 million, the second one looks more profitable on a normalized basis. Adjusted EBITDA also helps investors spot trends: if a company's adjusted EBITDA grows 15% year over year, that growth is not driven by a one-time gain.

The catch is that adjusted EBITDA is not audited the same way net income is. The company chooses what to adjust, so two investors might reasonably disagree on whether a particular adjustment was fair or whether the company was hiding something by removing it.

How adjusted EBITDA compares to net income

Net income is the bottom line on an income statement — revenue minus all expenses, taxes, and interest. Adjusted EBITDA is much higher because it adds back depreciation, amortization, interest, taxes, and one-time items. Net income reflects what the company actually kept; adjusted EBITDA reflects operating cash generation before financing and tax decisions.

A company might have high adjusted EBITDA but low or negative net income if it carries a lot of debt (high interest expense), pays high taxes, or has large depreciation charges. Conversely, a company with low adjusted EBITDA but positive net income is rare but possible if it has very low debt and large one-time gains. Both numbers matter: adjusted EBITDA shows operating strength, while net income shows what shareholders actually own.

The risk of relying too heavily on adjusted EBITDA

Adjusted EBITDA can be manipulated. A company facing a weak year might classify normal operating expenses as "one-time" and remove them, inflating adjusted EBITDA. There is no enforcement mechanism to stop this, especially for private companies that do not file with the SEC. Even public companies have some room to interpret what counts as unusual.

Investors and lenders should always compare adjusted EBITDA to standard EBITDA and read the reconciliation carefully. If adjustments are large, frequent, or vague, that is a red flag. A company that removes $2 million in "other costs" without detail is harder to trust than one that lists specific, documented items. It is also worth asking whether the adjustments are truly non-recurring: if a company adjusts for legal costs every year, those costs are recurring, not one-time.

Adjusted EBITDA in different industries

Technology and software companies often adjust for stock-based compensation because they use equity heavily to pay employees. Real estate and energy companies might adjust for asset sales or impairments. Retail and hospitality companies might adjust for store closures or restructuring. The nature of the business shapes what adjustments make sense.

This means comparing adjusted EBITDA across industries requires care. A tech company's adjusted EBITDA might exclude $5 million in stock compensation, while a manufacturing company's might exclude $2 million in plant shutdown costs. The adjusted figures are not directly comparable without understanding what was removed and why.

How to find adjusted EBITDA in financial statements

Public companies file a Form 10-K with the SEC each year. The adjusted EBITDA reconciliation is usually in the Management's Discussion and Analysis section (MD&A) or in the footnotes to the financial statements. It will show standard EBITDA, then list each adjustment, and arrive at adjusted EBITDA. Some companies also report adjusted EBITDA in their earnings press releases.

Private companies may report adjusted EBITDA to lenders or investors but do not file it publicly. If you are evaluating a private company, you will need to ask for the reconciliation directly. The company should be able to provide a clear breakdown of what was adjusted and why.

Frequently Asked Questions

Is adjusted EBITDA always higher than standard EBITDA?

No. Adjusted EBITDA is higher when one-time costs are removed, but it is lower when one-time income is removed. If a company sold a building and recorded a $3 million gain, adjusted EBITDA would subtract that gain, making it lower than standard EBITDA. Most of the time, though, companies adjust for costs, so adjusted EBITDA is higher.

Can I use adjusted EBITDA to compare two companies?

Yes, but carefully. Adjusted EBITDA is useful for comparing companies in the same industry because the adjustments tend to be similar. Comparing a tech company to a manufacturing company is harder because they adjust for different things. Always look at what each company removed before drawing conclusions.

Why don't companies just use standard EBITDA?

Standard EBITDA can be distorted by one-time events that have nothing to do with how well the business runs. A lawsuit settlement or a building sale might make standard EBITDA look artificially low or high in a single year. Adjusted EBITDA tries to show the underlying operating performance, which is what lenders and investors care about for making decisions.

Who decides what counts as an adjustment?

The company decides, usually in consultation with its auditors and lenders. There is no regulatory rule that says "these items must be adjusted." This is why it is important to read the footnotes and reconciliation — you need to see what the company removed and decide whether you agree it was one-time or unusual.

Is adjusted EBITDA audited?

Adjusted EBITDA is not audited the same way net income is. Auditors review the reconciliation to make sure the math is correct and the adjustments are disclosed, but they do not independently verify that each adjustment was truly one-time or unusual. This is one reason to treat adjusted EBITDA as a starting point, not a final answer.