Adjusted EBITDA is a measure of a company’s profitability that is calculated by taking EBITDA and making adjustments for non-operating items such as depreciation, amortization, and interest expense. This measure is used to compare companies with different sizes and industries.

Formula for Adjusted EBITDA:

Adjusted EBITDA = EBITDA – Depreciation – Amortization – Interest Expense

Explanation of Adjustments:

• Depreciation: The decrease in value of assets over time that is recorded as an expense.
• Amortization: The gradual reduction of the cost of intangible assets over time, such as patents and trademarks.
• Interest Expense: The cost of borrowing money, which is deducted from revenue to calculate EBITDA.

Uses of Adjusted EBITDA:

• To compare companies with different sizes and industries.
• To assess a company’s financial strength and its ability to generate cash flow.
• To estimate a company’s value.
• To calculate a company’s debt-to-equity ratio.

Advantages:

• Standardized measure of profitability.
• Allows for comparison of companies with different sizes and industries.
• Provides a more accurate reflection of a company’s true operating performance.

Disadvantages:

• Can be difficult to calculate accurately.
• May not be a perfect measure of profitability.
• Can be manipulated by companies to make their financial statements look better.