What Is Adjusted EBITDA?

Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) is a measure computed for a company that takes its earnings and adds back interest expenses, taxes, and depreciation charges, plus other adjustments to the metric.

Standardizing EBITDA by removing anomalies means the resulting adjusted or normalized EBITDA is more accurately and easily comparable to the EBITDA of other companies, and to the EBITDA of a company’s industry as a whole.

The Formula for Adjusted EBITDA Is


$\begin{aligned} ∋+IT+DA=EBITDA\\ &EBITDA +\!\!/\!\!-A = \text{Adjusted }EBITDA\\ &\textbf{where:}\\ ∋\ =\ \text{Net income}\\ &IT\ =\ \text{Interest \& taxes}\\ &DA\ =\ \text{Depreciation \& amortization}\\ &A\ =\ \text{Adjustments} \end{aligned}$​NI+IT+DA=EBITDAEBITDA+/−A=Adjusted EBITDAwhere:NI = Net incomeIT = Interest & taxesDA = Depreciation & amortization​

How to Calculate Adjusted EBITDA

Start by calculating earnings before income, taxes, depreciation, and amortization, i.e. EBITDA, which begins with a company’s net income. To this figure, add back interest expense, income taxes, and all non-cash charges including depreciation and amortization.

Next, either add back non-routine expenses, such as excessive owner’s compensation or deduct any additional, typical expenses that would be present in peer companies but may not be present in the company under analysis. This could include salaries for necessary headcount in a company that is under-staffed, for example.

What Does Adjusted EBITDA Tell You?

Adjusted EBITDA is used to assess and compare related companies for valuation analysis and for other purposes. Adjusted EBITDA differs from the standard EBITDA measure in that a company’s adjusted EBITDA is used to normalize its income and expenses since different companies may have several types of expense items that are unique to them. Adjusted EBITDA, as opposed to the non-adjusted version, will attempt to normalize income, standardize cash flows, and eliminate abnormalities or idiosyncrasies (such as redundant assets, bonuses paid to owners, rentals above or below fair market value, etc.), which makes it easier to compare multiple business units or companies in a given industry.

For smaller firms, owners’ personal expenses are often run through the business and must be adjusted out. The adjustment for reasonable compensation to owners is defined by Treasury Regulation 1.162-7(b)(3) as “the amount that would ordinarily be paid for like services by like organizations in like circumstances.”

Other times, one-time expenses need to be added back, such as legal fees, real estate expenses such as repairs or maintenance, or insurance claims. Non-recurring income and expenses such as one-time startup costs that usually reduce EBITDA should also be added back when computing the adjusted EBITDA.

Adjusted EBITDA should not be used in isolation and makes more sense as part of a suite of analytical tools used to value a company or companies. Ratios that rely on adjusted EBITDA can also be used to compare companies of different sizes and in different industries, such as the enterprise value/adjusted EBITDA ratio. 

Example of How to Use Adjusted EBITDA

The adjusted EBITDA metric is most helpful when used in determining the value of a company for transactions such as mergers, acquisitions or raising capital. For example, if a company is valued using a multiple of EBITDA, the value could change significantly after add-backs.

Assume a company is being valued for a sale transaction, using an EBITDA multiple of 6x to arrive at the purchase price estimate. If the company has just $1 million of non-recurring or unusual expenses to add back as EBITDA adjustments, this adds $6 million ($1 million times the 6x multiple) to its purchase price. For this reason, EBITDA adjustments come under much scrutiny from equity analysts and investment bankers during these types of transactions.

The adjustments made to a company’s EBITDA can vary quite a bit from one company to the next, but the goal is the same. Adjusting the EBITDA metric aims to “normalize” the figure so that it is somewhat generic, meaning it contains essentially the same line-item expenses that any other, similar company in its industry would contain.

The bulk of the adjustments are often different types of expenses that are added back to EBITDA. The resulting adjusted EBITDA often reflects a higher earnings level because of the reduced expenses.

EBITDA Adjustments

Common EBITDA adjustments include:

• Unrealized gains or losses
• Non-cash expenses (depreciation, amortization)
• Litigation expenses
• Owner’s compensation that is higher than the market average (in private firms)
• Gains or losses on foreign exchange
• Goodwill impairments
• Non-operating income
• Share-based compensation

This metric is typically calculated on an annual basis for a valuation analysis, but many companies will look at adjusted EBITDA on a quarterly or even monthly basis, though it may be for internal use only.

Analysts often use a three-year or five-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 EBITDA due to differences in their methodology and assumptions in making the adjustments.

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.

What Is the Adjusted Closing Price?

The adjusted closing price amends a stock’s closing price to reflect that stock’s value after accounting for any corporate actions. It is often used when examining historical returns or doing a detailed analysis of past performance.

Understanding the Adjusted Closing Price

Stock values are stated in terms of the closing price and the adjusted closing price. The closing price is the raw price, which is just the cash value of the last transacted price before the market closes. The adjusted closing price factors in anything that might affect the stock price after the market closes.

A stock’s price is typically affected by supply and demand of market participants. However, some corporate actions, such as stock splits, dividends, and rights offerings, affect a stock’s price. Adjustments allow investors to obtain an accurate record of the stock’s performance. Investors should understand how corporate actions are accounted for in a stock’s adjusted closing price. It is especially useful when examining historical returns because it gives analysts an accurate representation of the firm’s equity value.

Types of Adjustments

Adjusting Prices for Stock Splits

A stock split is a corporate action intended to make the firm’s shares more affordable for average investors. A stock split does not change a company’s total market capitalization, but it does affect the company’s stock price.

For example, a company’s board of directors may decide to split the company’s stock 3-for-1. Therefore, the company’s shares outstanding increase by a multiple of three, while its share price is divided by three. Suppose a stock closed at $300 the day before its stock split. In this case, the closing price is adjusted to $100 ($300 divided by 3) per share to maintain a consistent standard of comparison. Similarly, all other previous closing prices for that company would be divided by three to obtain the adjusted closing prices.

Adjusting for Dividends

Common distributions that affect a stock’s price include cash dividends and stock dividends. The difference between cash dividends and stock dividends is that shareholders are entitled to a predetermined price per share and additional shares, respectively.

For example, assume a company declared a $1 cash dividend and was trading at $51 per share before then. All other things being equal, the stock price would fall to $50 because that $1 per share is no longer part of the company’s assets. However, the dividends are still part of the investor’s returns. By subtracting dividends from previous stock prices, we obtain the adjusted closing prices and a better picture of returns.

Adjusting for Rights Offerings

A stock’s adjusted closing price also reflects rights offerings that may occur. A rights offering is an issue of rights given to existing shareholders, which entitles the shareholders to subscribe to the rights issue in proportion to their shares. That will lower the value of existing shares because supply increases have a dilutive effect on the existing shares.

For example, assume a company declares a rights offering, in which existing shareholders are entitled to one additional share for every two shares owned. Assume the stock is trading at $50, and existing shareholders can purchase additional shares at a subscription price of $45. After the rights offering, the adjusted closing price is calculated based on the adjusting factor and the closing price.

Benefits of the Adjusted Closing Price

The main advantage of adjusted closing prices is that they make it easier to evaluate stock performance. Firstly, the adjusted closing price helps investors understand how much they would have made by investing in a given asset. Most obviously, a 2-for-1 stock split does not cause investors to lose half their money. Since successful stocks often split repeatedly, graphs of their performance would be hard to interpret without adjusted closing prices.

Secondly, the adjusted closing price allows investors to compare the performance of two or more assets. Aside from the clear issues with stock splits, failing to account for dividends tends to understate the profitability of value stocks and dividend growth stocks. Using the adjusted closing price is also essential when comparing the returns of different asset classes over the long term. For example, the prices of high-yield bonds tend to fall in the long run. That does not mean these bonds are necessarily poor investments. Their high yields offset the losses and more, which can be seen by looking at the adjusted closing prices of high-yield bond funds.

Criticism of the Adjusted Closing Price

The nominal closing price of a stock or other asset can convey useful information. This information is destroyed by converting that price into an adjusted closing price. In actual practice, many speculators place buy and sell orders at certain prices, such as $100. As a result, a sort of tug of war can take place between bulls and bears at these key prices. If the bulls win, a breakout may occur and send the asset price soaring. Similarly, a win for the bears can lead to a breakdown and further losses. The adjusted close stock price obscures these events.

By looking at the actual closing price at the time, investors can get a better idea of what was going on and understand contemporary accounts. If investors look at historical records, they will find many examples of tremendous public interest in nominal levels. Perhaps the most famous is the role that Dow 1,000 played in the 1966 to 1982 secular bear market. During that period, the Dow Jones Industrial Average (DJIA) repeatedly hit 1,000, only to fall back shortly after that. The breakout finally took place in 1982, and the Dow never dropped below 1,000 again. This phenomenon is covered up somewhat by adding dividends to obtain the adjusted closing prices.

In general, adjusted closing prices are less useful for more speculative stocks. Jesse Livermore provided an excellent account of the impact of key nominal prices, such as $100 and $300, on Anaconda Copper in the early 20th century. In the early 21st century, similar patterns occurred with Netflix (NFLX) and Tesla (TSLA). William J. O’Neil gave examples where stock splits, far from being irrelevant, marked the beginnings of real declines in the stock price. While arguably irrational, the impact of nominal prices on stocks could be an example of a self-fulfilling prophecy.

What Are Adjusted Funds From Operations—AFFO?

Adjusted funds from operations (AFFO) refers to the financial performance measure primarily used in the analysis of real estate investment trusts (REITs). The AFFO of a REIT, though subject to varying methods of computation, is generally equal to the trust’s funds from operations (FFO) with adjustments made for recurring capital expenditures used to maintain the quality of the REIT’s underlying assets. The calculation takes in the adjustment to GAAP straight-lining of rent, leasing costs, and other material factors.

Understanding Adjusted Funds From Operations—AFFO

Regardless of how industry professionals choose to compute adjusted funds from operations (AFFO), it is considered to be a more accurate measure of residual cash flow for shareholders than simple FFO. Though FFO is commonly used, it does not deduct for capital expenditures required to maintain the existing portfolio of properties, so it doesn’t quite measure the true residual cash flow. Professional analysts prefer AFFO because it takes into consideration additional costs incurred by the REIT—and additional income sources too, like rent increases. Thus, It provides for a more accurate base number when estimating present values and a better predictor of the REIT’s future ability to pay dividends. This is a non-GAAP measure.

Calculating Adjusted Funds From Operations—AFFO

Before calculating the AFFO, an analyst must first determine the REIT’s funds from operations (FFO). The FFO measures cash flow from a specified list of activities. FFO reflects the impact from the REIT’s leasing and acquisition activity, as well as interest costs. FFO takes into account the REIT’s net income including amortization and depreciation, but it excludes the capital gains from property sales. The reasons these gains are not included is that they are one time events and generally do not have a long-term effect on the REIT’s future earnings potential.

The formula for FFO is:

FFO = net income + amortization + depreciation – capital gains from property sales

Once the FFO is determined, the AFFO can be calculated. Though there is no one official formula, calculations for AFFO typically would be something like:

AFFO = FFO + rent increases – capital expenditures – routine maintenance amounts

Example of an Adjusted Funds From Operations—

AFFO Calculation

As an example of the AFFO calculation, assume the following: a REIT had $2 million in net income over the last reporting period. During that time, it earned $400,000 from the sale of one of its properties and lost $100,000 from the sale of another. It reported $35,000 of amortization and $50,000 of depreciation. During the period, net rent increases were $40,000; capital expenditures were $75,000 and routine maintenance amounted to $30,000.

Given this information the FFO can be calculated as:

FFO = $2,000,000 + $35,000 + $50,000 – ($400,000 – $100,000) = $1,785,000

From this, the AFFO is calculated as:

AFFO = FFO + $40,000 – $75,000 – $30,000 = $1,720,000

What Is Adjusted Present Value (APV)?

The adjusted present value is the net present value (NPV) of a project or company if financed solely by equity plus the present value (PV) of any financing benefits, which are the additional effects of debt. By taking into account financing benefits, APV includes tax shields such as those provided by deductible interest.

The Formula for APV Is


$\begin{aligned} &\text{Adjusted Present Value = Unlevered Firm Value + NE}\\ &\textbf{where:}\\ &\text{NE = Net effect of debt}\\ \end{aligned}$​Adjusted Present Value = Unlevered Firm Value + NEwhere:NE = Net effect of debt​

The net effect of debt includes tax benefits that are created when the interest on a company’s debt is tax-deductible. This benefit is calculated as the interest expense times the tax rate, and it only applies to one year of interest and tax. The present value of the interest tax shield is therefore calculated as: (tax rate * debt load * interest rate) / interest rate.

How to Calculate Adjusted Present Value (APV)

To determine the adjusted present value:

1. Find the value of the un-levered firm.
2. Calculate the net value of debt financing.
3. Sum the value of the un-levered project or company and the net value of the debt financing.

How to Calculate APV in Excel

An investor can use Excel to build out a model to calculate the net present value of the firm and the present value of the debt.

What Does Adjusted Present Value Tell You?

The adjusted present value helps to show an investor the benefits of tax shields resulting from one or more tax deductions of interest payments or a subsidized loan at below-market rates. For leveraged transactions, APV is preferred. In particular, leveraged buyout situations are the most effective situations in which to use the adjusted present value methodology.

The value of a debt-financed project can be higher than just an equity-financed project, as the cost of capital falls when leverage is used. Using debt can actually turn a negative NPV project into one that’s positive. NPV uses the weighted average cost of capital as the discount rate, while APV uses the cost of equity as the discount rate.

Example of How to Use Adjusted Present Value (APV)

In a financial projection where a base-case NPV is calculated, the sum of the present value of the interest tax shield is added to obtain the adjusted present value.

For example, assume a multi-year projection calculation finds that the present value of Company ABC’s free cash flow (FCF) plus terminal value is $100,000. The tax rate for the company is 30% and the interest rate is 7%. Its $50,000 debt load has an interest tax shield of $15,000, or ($50,000 * 30% * 7%) / 7%. Thus, the adjusted present value is $115,000, or $100,000 + $15,000.

The Difference Between APV and Discounted Cash Flow (DCF)

While the adjusted present value method is similar to the discounted cash flow (DCF) methodology, adjusted present cash flow does not capture taxes or other financing effects in a weighted average cost of capital (WACC) or other adjusted discount rates. Unlike WACC used in discounted cash flow, the adjusted present value seeks to value the effects of the cost of equity and cost of debt separately. The adjusted present value isn’t as prevalent as the discounted cash flow method.

Limitations of Using Adjusted Present Value (APV)

In practice, the adjusted present value is not used as much as the discounted cash flow method. It is more of an academic calculation but is often considered to result in more accurate valuations.

Learn More About Adjusted Present Value (APV)

To dig deeper into calculating the adjusted present value, check out Investopedia’s guide to calculating net present value.