Adjusted EBITDA — The Dollar Dictionary

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Accounting

Adjusted EBITDA

EBITDA with additional non-recurring or non-cash items removed, used to show a company's 'normalized' operating earnings.

Adjusted EBITDA is everywhere in private equity, M&A, and leveraged buyout analysis. When a PE firm acquires a company, they project Adjusted EBITDA and apply a multiple to arrive at a valuation. The adjustments are supposed to represent genuinely one-time items — a factory fire insurance claim, a one-time legal settlement, costs from a discontinued division.

The problem is that 'adjustments' can become a way to hide structural problems. If a company adds back 'restructuring charges' every single year for five years, those aren't non-recurring — they're a core part of how the business operates. Always compare Adjusted EBITDA to actual free cash flow. A massive gap between the two is a warning sign that the adjustments are doing more work than they should.

It's EBITDA with its blemishes airbrushed out. Companies add back one-time restructuring charges, lawsuit settlements, executive severance, and stock compensation to show investors what earnings would look like without the messy stuff. Whether that messy stuff is truly 'one-time' is the question investors need to ask.

Real world: WeWork famously reported 'Community-Adjusted EBITDA' — stripping out basic operating costs to make losses look smaller. Investors eventually saw through it. During their failed IPO attempt, analysts noted the metric excluded expenses so fundamental to the business that what remained bore almost no relationship to actual profitability.

💡 Adjusted EBITDA can reveal true operating performance — or it can be financial storytelling. The more adjustments there are, the more scrutiny each one deserves.

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