Table of Contents
Every CFO knows the feeling. You’re sitting in a board meeting, and someone asks about EBITDA. The number sits there on the slide, stubbornly refusing to be impressive. You know your business is performing better than this metric suggests, but explaining why requires a PowerPoint deck and a minor in accounting.
Here’s the uncomfortable truth: EBITDA is both the most watched and most manipulated metric in corporate finance. Not manipulated in the orange jumpsuit sense, but in the way a photographer adjusts lighting to capture a subject’s best angle. The number tells a story, and like any storyteller, you have creative license within certain boundaries.
The real secret weapon isn’t about deception. It’s about understanding that EBITDA, despite its mathematical appearance, is ultimately a narrative device. And every narrative has room for interpretation.
Why EBITDA Became the Emperor of Metrics
Before we discuss enhancement techniques, we should acknowledge why anyone cares about EBITDA in the first place. Earnings Before Interest, Taxes, Depreciation, and Amortization sounds like something created by committee, because it was. Private equity firms needed a way to compare companies across different capital structures and tax jurisdictions. They needed to see operational performance stripped of financial engineering.
The irony is delicious. A metric designed to reveal pure operational truth became the most engineered number in finance. It’s like inventing a lie detector test that people immediately learn to fool.
But EBITDA stuck around because it serves a psychological function. Investors want to believe they can see the “real” earning power of a business. CFOs want to show operations in the best possible light. EBITDA became the compromise, the handshake between optimism and accountability.
One Time Items: The Art of Defining Normal
The most powerful tool in the EBITDA enhancement toolkit is the one time adjustment. The logic is simple. If something truly won’t repeat, it shouldn’t cloud the picture of normal operations.
But what counts as one time? This is where philosophy meets finance.
You restructured your sales force? One time expense. You settled a lawsuit? One time expense. You paid a severance package to an executive? One time expense. Your warehouse flooded? Definitely one time.
The trick is that “one time” is a slippery concept. Consider a retail company that closes underperforming stores every year. Each store closure is technically a one time event. But if you’re always closing stores, is it really one time or just part of managing a retail business?
Smart CFOs recognize that credibility matters more than creativity. If you adjust out truly anomalous events, investors will trust you. If you adjust out anything that makes the numbers look bad, they’ll start discounting your EBITDA entirely. You’ll have won the battle but lost the war.
The best approach treats one time adjustments like a rare spice. Used occasionally, they enhance the flavor. Used constantly, they overpower the dish.
Stock Based Compensation: The Great Debate
This might be the most controversial adjustment in modern finance. Companies issue stock to employees as compensation. This dilutes shareholders. But it doesn’t hit the cash flow statement directly. So should it reduce EBITDA?
Tech companies say no. They argue stock compensation is a financing decision, not an operating expense. It’s a way of paying employees with future value rather than present cash. By this logic, it belongs in the same category as interest expenses, something EBITDA intentionally ignores.
Critics counter that if employees demanded cash instead, the company would have to generate that cash from operations. Stock compensation is just operations paid in a different currency. Excluding it makes EBITDA nearly meaningless for companies with heavy stock compensation.
Both sides have a point. This is what makes finance interesting. The “right” answer depends on your theory of what a business fundamentally is. Are you measuring cash generating ability? Economic value creation? Operational efficiency divorced from capital structure?
Most CFOs at high growth companies add back stock compensation. The audience expects it. But the sophisticated ones also present alternative calculations and discuss the impact. Transparency beats cleverness every time.
Transformation Costs: Investment or Expense?
Companies increasingly adjust out “transformation costs,” the expenses associated with major strategic shifts. Moving to the cloud, implementing new ERP systems, reorganizing into new business units.
The logic parallels one time adjustments. These costs enable future earnings but don’t reflect ongoing operations. They’re investments masquerading as expenses due to accounting conservatism.
But here’s the rub. If you’re constantly transforming, are these really separate from normal operations? Isn’t continuous transformation just the cost of staying competitive in modern business?
The best companies are transparent about this. They’ll adjust out transformation costs but also show a multi-year trend. If transformation costs are constant, investors can see through the adjustment. If they truly spike during specific initiatives then decline, the adjustment gains credibility.
Currency and Devaluation
For multinational companies, currency fluctuations can significantly impact reported earnings. Many CFOs present constant currency EBITDA alongside reported EBITDA. This removes currency effects to show operational performance.
This adjustment is particularly defensible because currency moves are genuinely outside management’s control. You didn’t operate better or worse. The exchange rate changed.
But constant currency calculations also allow you to pick your baseline. If the dollar strengthened this year, constant currency numbers will look better. If it weakened, you might emphasize reported numbers. The flexibility itself becomes a tool.
The Limits of Enhancement
Every adjustment technique has a natural boundary, the point where enhancement becomes distortion. Crossing this line doesn’t necessarily mean breaking the law. It means breaking trust with your audience.
The audience in this case isn’t stupid. Analysts and sophisticated investors scrutinize adjusted EBITDA closely. They know the game. When you adjust out truly anomalous items, they nod along. When you adjust out recurring challenges, they discount your credibility.
Think of adjusted EBITDA like makeup. A little bit enhances natural features. Too much makes people wonder what you’re hiding.
The companies that maintain credibility follow a few principles. They keep adjustments consistent year over year. They provide reconciliation tables that clearly show what was adjusted and why. They present both adjusted and unadjusted figures. They limit adjustments to items that genuinely don’t reflect ongoing operations.
The Deeper Game
Here’s what most articles about EBITDA manipulation miss. The real game isn’t about making numbers look good for one quarter or one year. It’s about establishing a narrative framework that investors accept as legitimate.
When investors trust your adjustments, they internalize your story about what your business is and how it should be measured. This is far more valuable than any short term boost to a metric. It means analysts will use your framework in their models. Credit rating agencies will accept your methodology. Your stock gets valued on terms you helped define.
This is the actual secret weapon. Not tactical adjustments but strategic narrative building.
The CFOs who master this understand that finance is ultimately about communication. Numbers don’t speak for themselves. They require interpretation. The question is whether you’re interpreting honestly or creatively.
What This Means for You
If you’re a CFO considering aggressive adjustments, ask yourself a simple question. Would you want to explain this adjustment to a skeptical board member who understands accounting? If yes, proceed. If no, reconsider.
The best adjustments improve clarity rather than just improving numbers. They help investors see what you see when you look at operational performance. They remove genuine noise while preserving signal.
Remember that investors eventually figure out games. They might accept inflated EBITDA for a while, but when results don’t match the story, credibility evaporates fast. And credibility, once lost, rarely returns.
The companies with the highest valuations aren’t always those with the highest adjusted EBITDA. They’re the companies whose CFOs have built trust through consistent, defensible financial communication. They enhance EBITDA when appropriate but never sacrifice transparency for optics.
The Final Irony
We started by noting that EBITDA was created to strip away financial engineering and reveal operational truth. We’ve spent the rest of this article discussing how to engineer EBITDA itself.
This isn’t really a contradiction. It’s an acknowledgment that any metric, no matter how carefully designed, is still just a model of reality. And all models require judgment in application.
The CFO’s secret weapon isn’t any specific adjustment technique. It’s understanding that financial reporting is fundamentally about judgment and narrative. The numbers matter, but the story you tell about those numbers matters more.
The law gives you significant flexibility in calculating adjusted EBITDA. The market gives you far less. Use your flexibility wisely. Enhance when enhancement reveals truth. Restrain when restraint preserves credibility.
In the end, the best way to inflate EBITDA legally is also the most boring: run better operations. Everything else is just lighting and camera angles. And while good lighting helps, it can’t turn a bad photo into a good one.
The real secret weapon is building a business worth measuring accurately in the first place.
