What is Adjusted EBITDA?
Adjusted EBITDA is a non-GAAP metric that measures a company’s normalized cash profits. Adjusted EBITDA is essentially EBITDA plus or minus adjustments. These adjustments usually include non-cash items in addition to D&A (i.e. Stock-Based Compensation), non-recurring items, and run-rate adjustments.
This metric is usually used in financial analysis for valuation and debt covenant purposes.
You emphasized in the cost lesson that expenses like D&A are real expenses, despite being non-cash, but here adjusted EBITDA a popularly used number strips away all non-cash and non-recurring items. Isn’t that a bit contradicting?
It’s not contradicting. It’s the same story as SBC.
We taught you EBITDA / Adjusted EBITDA because these are widely used metrics. It’s the metrics that the industry uses: Wall Street, management, academia, etc. Therefore, we teach you what EBITDA / Adjusted EBITDA are. However, it’s precisely because these metrics are widely used that people start to take D&A for granted as if it’s free.
We’re reminding you that D&A is a real expense.