Adjusted EBITDA: Definition, Uses and How To Calculate

By Indeed Editorial Team

Published June 15, 2021

For many companies, EBITDA is an essential tool for gauging their financial state. Adjusted EBITDA is a form of EBITDA that removes irregular items in order to calculate a figure that isn't altered by irregular, one-time or non-recurring items. If you work in business, it's useful to understand and know how to calculate adjusted EBITDA. In this article, we explain what adjusted EBITDA is, types of EBITDA adjustments, uses for adjusted EBITDA, how to calculate adjusted EBITDA using a formula and an example of an adjusted EBITDA calculation.

Adjusted EBITDA is a metric for clearly understanding the financial state and valuation of a company. Adjusted EBITDA is a type of EBITDA that does not include irregular items. EBITDA, which is a measurement of a company's earnings, stands for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA can help you clearly understand the financial state of a company through its different elements:

• Earnings: Earnings include all income a company generates minus operating expenses.

• Interest: Interest consists of funding for loans as well as debt from delaying loans. Interest is not subtracted from earnings in EBITDA.

• Taxes: Taxes are parts of profits that are paid to the government. Typically, taxes vary based on region.

• Depreciation: Depreciation is a decrease in value that an asset experiences throughout its life span. Usually, depreciation occurs because of repeated use of equipment or other assets.

• Amortization: Amortization is an accounting method that divides a loan or an asset into multiple payments over time.

EBITDA is often used to help gauge a company's performance and value. Calculating adjusted EBITDA involves adding or subtracting adjustments from standard EBITDA. The goal of calculating adjusted EBITDA is to get a figure that hasn't been altered by irregular, one-time or non-recurring items. This can make it easier to compare companies in the same industry, making adjusted EBITDA one of the main metrics that potential buyers pay attention to. There are many other uses for adjusted EBITDA, including company valuation, forecasting and budgeting. There are also many items that companies often adjust, including donations, litigation costs and one-time expenses.

Related: What Is EBITDA?

The items included in adjusted EBITDA can vary widely from company to company. Some of the most common EBITDA adjustments include:

• Start-up costs

• Litigation costs

• Donations

• One-time expenses

• Investments

• Rent expenses

• Maintenance and repairs expenses

• Foreign exchange income or losses

• Owner salary and related expenses

• Real estate expenses

• New hire expenses

There are many uses for calculating adjusted EBITDA, and one of the most common applications is finding a company's value. Valuation, which is often performed by financial analysts and other people who work in finance, typically occurs before large corporate transactions. Potential buyers also pay attention to adjusted EBITDA.

Calculating adjusted EBITDA can give you a normalized number that hasn't been altered by irregularities. Therefore, adjusting EBITDA can make a company's expenses look more similar to other companies in the same industry, making it easier to compare companies. Calculating adjusted EBITDA can also be useful for getting a clearer idea of your company's financial state, which can help you in creating financial forecasts and budgeting.

Related: Why EBITDA Is Important for a Business (With Example)

The adjusted EBITDA formula includes standard EBITDA. The formula for standard EBITDA is:

Net income (E) + interest (I) + taxes (T) + depreciation (D) + amortization (A) = EBITDA

The formula for adjusted EBITDA is:

Here are three simple steps based on the formulas we provided you can follow to calculate adjusted EBITDA:

1. Find the values of your variables

The first step to calculating adjusted EBITDA is finding the information that you need in order to use the adjusted EBITDA formula. You can analyze your company's financial statements to find your net income, taxes, depreciation and amortization.

You can find your net income and depreciation expenses on your company's income statement. Your amortization expense is on your income statement, and you can find the corresponding asset on the balance sheet. You can find your company's tax information on its income statement, cash flow statement and balance sheet.

Related: What Are Financial Statements?

2. Calculate standard EBITDA

After finding the value for each variable in the EBITDA formula, you can use the formula to calculate the standard EBITDA. Replace each variable in the formula with the corresponding value using the information from your company's financial statements. Add together net income, interest, taxes, depreciation and amortization to find the standard EBITDA.

Related: How To Calculate EBITDA (With Examples)

Imagine that Orange Avenue Office Supplies wants to calculate its adjusted EBITDA. Using the formulas that we provided, the financial analyst for Orange Avenue Office Supplies uses the company's financial data to calculate adjusted EBITDA. The financial analyst uses the following values:

• Net income: \$500,000

• Taxes: \$7500

• Interest expense: \$500

• Depreciation and amortization: \$2000