Adjusted EBITDA takes EBITDA — earnings before interest, taxes, depreciation, and amortization — and adds back one-off or non-operating items (known as "add-backs"): restructuring costs, non-recurring legal expenses, owner compensation adjustments, and the like. The aim is to present a normalized picture of the earnings power of the underlying business.
Adjusted EBITDA should be read with care, because add-backs are where optimism hides. Each adjustment is a judgment that an expense is not representative of ongoing operations, and aggressive or generous add-backs can inflate the figure a valuation multiple is applied to. Scrutinizing the quality and durability of each add-back is a core part of diligence.