metrics explained

EBITDA vs Adjusted EBITDA: What's the Difference?

EBITDA and adjusted EBITDA are two financial metrics that are often used to measure a company's profitability. While EBITDA simply measures a company's earnings before interest, taxes, depreciation, and amortization, adjusted EBITDA makes further adjustments to this metric to better reflect a company's true operating cash flow. In this article, we'll take a closer look at the difference between EBITDA and adjusted EBITDA and how each metric can be used to assess a company's financial health.

What is EBITDA?

EBITDA is an acronym for "earnings before interest, taxes, depreciation, and amortization." This metric is often used as a proxy for a company's operating cash flow, as it excludes non-operating expenses like interest and taxes. Depreciation and amortization are also excluded from EBITDA, as these are non-cash expenses that can be affected by a variety of accounting choices. For this reason, EBITDA is often considered a more accurate measure of a company's true operating cash flow.

What is Adjusted EBITDA?

Adjusted EBITDA is simply EBITDA with further adjustments made to better reflect a company's operating cash flow. These adjustments can vary from company to company, but they typically exclude items like one-time expenses, share-based compensation, and restructuring charges. Adjusted EBITDA is often used by investors and analysts to get a better sense of a company's true profitability.

How is EBITDA Calculated?

EBITDA can be calculated by adding back interest, taxes, depreciation, and amortization to a company's net income. This can be done on a per-period basis (e.g. quarterly or annually) or on a cumulative basis. The formula for calculating EBITDA is as follows:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

How is Adjusted EBITDA Calculated?

Adjusted EBITDA is calculated in the same way as EBITDA, with the addition of further adjustments to better reflect a company's operating cash flow. These adjustments can vary from company to company, but they typically exclude items like one-time expenses, share-based compensation, and restructuring charges. The formula for calculating adjusted EBITDA is as follows:

Adjusted EBITDA = EBITDA + Adjustments

What are the Limitations of EBITDA?

EBITDA is a helpful metric for assessing a company's profitability, but it does have its limitations. First, EBITDA excludes interest and taxes, which can be significant expenses for some companies. Second, EBITDA excludes depreciation and amortization, which can be affected by a variety of accounting choices. Finally, EBITDA does not reflect a company's cash flow, which is an important metric for assessing a company's financial health.

What are the Limitations of Adjusted EBITDA?

Adjusted EBITDA is a more accurate measure of a company's operating cash flow than EBITDA, but it still has its limitations. First, adjusted EBITDA is still affected by a variety of accounting choices. Second, adjusted EBITDA does not reflect a company's cash flow, which is an important metric for assessing a company's financial health.

Conclusion

EBITDA and adjusted EBITDA are two financial metrics that are often used to measure a company's profitability. EBITDA simply measures a company's earnings before interest, taxes, depreciation, and amortization, while adjusted EBITDA makes further adjustments to this metric to better reflect a company's true operating cash flow. In this article, we've taken a closer look at the difference between EBITDA and adjusted EBITDA and how each metric can be used to assess a company's financial health.

Upgrade your financial models

Get started with Causal today.
Build models effortlessly, connect them directly to your data, and share them with interactive dashboards and beautiful visuals.