CFOs are always talking about adjusted EBITDA, and I’m having trouble coming up with a formula for this. Has anyone come up with a reasonable one? I’m assuming we’d start with OpIncBDepr and add ExpNonOp, but are there additional “non-normal costs” on the 10-Q that should be added back to EBITDA?
Investopedia;
Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a measure computed for a company that looks at its “top line” earnings before deducting interest expense, taxes and depreciation charges. It is used to compare related companies and for purposes of valuation. Adjusted EBITDA differs from EBITDA in that adjusted EBITDA normalizes income and expenses since different companies may treat each type of income and expense differently. By standardizing cash flows and discounting anomalies that may occur, adjusted, or normalized, EBITDA can provide a useful measure of comparison when evaluating multiple companies.
Net Income - [Total Interest Expense, Income Taxes, Depreciation and Amortization, and Non-Cash Charges for Share-Based Compensation]
Measurement is typically done on an annual basis, but many analysts will look at 3-year or 5-year average adjusted EBITDA to smooth out the data. The higher the Adjusted EBITDA margin the better. Different firms or analysts may arrive at slightly different adjusted EBITDAs due to differences in their methodology and assumptions. As such, these figures are often not made available to the public, while non-normalized EBITDA is typically public information. It is important to note that adjusted EBITDA is not a Generally Accepted Accounting Principles (GAAP) standard line item on a company’s income statement.
I saw that, Denny, but as usual with Investopedia, the devil is in the details. Notice that their formula SUBTRACTS taxes and interest expense where it should be ADDED to net income, as net income is calculated after all those things are subtracted from net sales. Investopedia is full of mistakes like that. And the question remains: where in our coding would “non-cash charges for share-based compensation” fall? OpIncBDepr already takes care of adding everything else they mention to net income, and other websites I’ve consulted hint that non-operating income should be subtracted from EBITDA (and, conversely, non-operating expenses should be added to EBITDA) in order to get adjusted EBITDA. But perhaps P123’s formula for OpIncBDepr already adds non-operating expenses? And I know there’s no absolute standard for this but I’d love to know what other items in the 10Q are normally “adjusted” by CFOs.