Bill Hanna, a CPA, explains EBITDA (earnings before interest, taxes, depreciation, amortization) and Adjusted EBITDA. EBITDA starts at $350K in his example. Adjusted EBITDA adds back non-recurring items like legal settlements and stock compensation to reach $430K, but the adjustments are subjective.
Welcome back to another Finance Byte with your favorite financial controller, Bill Hanna, here. We're talking about EBITDA versus adjusted EBITDA. EBITDA is earnings before interest, taxes, depreciation, and amortization. The calculation goes net income and we add back all of these items. So net income from our income statement here is $200,000. We'll add back interest, taxes, depreciation, amortization. Interest, $30K. Our taxes are $50K. Depreciation right here, $50K. And our amortization is $20K. When we add it all together, we get $350K. That's our EBITDA, and that represents a proxy of the operating performance of the business because we're removing non-operating items like interest, taxes, depreciation, amortization. Which you have to apply your judgment to because in many cases depreciation is very much part of the operation of the business. So apply your judgment to this one. Adjusted EBITDA requires even more judgment. With this one, we're taking EBITDA and we're adding back some management-defined items. So management says some of these items are non-recurring or non-cash, that's why we're going to add them back. So in our case here, we take EBITDA, which is $350,000 And we'll add back some items. In this case, management is saying I have a one-time legal settlement, a founder's relocation costs. These are non-recurring in the business. We have stock-based comp. Management is saying this is non-cash, and that's why we're going to add it back. So they're going to say add back $80,000 of non-cash, non-recurring items. We get to profitability of adjusted EBITDA $430K. Notice how the two, two numbers are different. Adjusted EBITDA allows management to add back some subjective items to their earnings. So therefore, adjusted EBITDA is all about recurring, so they're adding back non-recurring items, and it has a lot of judgment to it, uh, to which what management applies as an adjustment to EBITDA. If you like to hear more Finance Bytes from me, go ahead and subscribe to the channel.
