Adjusted EBITDA is a performance indicator that provides a comprehensive look at a company’s earnings. It is a modification of the traditional Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) measurement and takes into account non-recurring or non-cash items. It is a non-GAAP (Generally Accepted Accounting Principles) accounting measurement used to assess the underlying financial performance of a business and its operating performance without the fluctuation of capital structure, large one-time items, and income tax effect.

EBITDA can be unpredictable due to fluctuates in the business cycle and one-time, nonoperating events, such as a major restructuring, dividend payments or cash balances that can cause the measurement values to differ from one year to the next. Theadjusted EBITDA measurement removes these types of nonrecurring, irregular, and one-time items so as to provide a more reliable, normalized measure of a company’s operating performance, which helps make comparisons more meaningful across a variety of companies and industries.

The main purpose of an adjusted EBITDA calculation is to provide a much needed understanding of the real earning potential of a business separate from any extraordinary, non-cash, or non-recurring transactions. Since adjusted EBITDA does not account for interest expense, taxes, depreciation, and amortization, it is generally seen as being a non-GAAP measure, which is why public companies that report standard operating results do not include this figure on financial statement filings.

By including these measurements, investors can gain a better understanding of the short and long-term health of a business. Investors may consider comparing EPS (earnings per share) and adjusted EBITDA to make their decisions more efficient. Adjustment to the EBITDA might depend on the industry, as certain industries have different financial statement metrics which are seen to be more meaningful indicators of the health of the business.

To sum up, adjusted EBITDA is a versatile key performance indicator (KPI) that offers businesses and investors crucial information about a company’s day-to-day performance and earnings potential, separately from any extraordinary, non-cash, or non-recurring transactions. Its core purpose is to measure how profitable a business can be without taking into account the effects of taxes, expense adjustment, and cash balance. Adjusted EBITDA is an important financial metric when analyzing the profitability of a company, which is why investors should consider using it in their research.