TDR University – Difference Between Earnings, EBITDA, and Adjusted EBITDA

The TDR Three Key Takeaways:

  1. Earnings vs. Cash Flow: Earnings reflect profit but not necessarily cash received, highlighting the need for careful examination of where earnings are coming from.
  2. EBITDA Limitations: EBITDA excludes costs like interest and taxes, which can give a misleading picture of operational profitability.
  3. Skepticism Toward Adjusted EBITDA: Adjusted EBITDA can remove too many expenses, distorting the financial analysis and potentially hiding real costs.

In financial analysis, grasping the differences between various earnings performance metrics is crucial to avoid being ensnared by flashy “press release numbers and headlines.” Commonly cited metrics such as Earnings, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and Adjusted EBITDA each provide distinct insights into a company’s financial health and operational effectiveness. This TDR University Blog will decode these three indicators, spotlighting their distinct functions, uses, and constraints. Following that, I’ll offer my perspective—a critical yet more measured take compared to the rather stark view of “Poor Charlie” depicted below.


Earnings, or net income, represent a company’s profit after all expenses have been deducted from total revenue. This figure includes costs such as COGS, operating expenses, taxes, and interest expenses. As the bottom-line figure on an income statement, earnings directly influence a company’s share price and dividend payouts, making it a primary measure of profitability.


EBITDA provides a closer look at operational performance by excluding the effects of financing and accounting decisions, specifically interest, taxes, depreciation, and amortization. This metric offers a pure view of a company’s operational profitability, facilitating a comparison across different companies and industries by neutralizing the impact of financial structure and non-cash accounting practices.

Adjusted EBITDA

First, earnings per share (EPS) can be misleading as they do not represent cash flow. For instance, sales on credit to customers with poor creditworthiness can inflate earnings without a corresponding increase in cash flow. Second, EBITDA further distorts this picture by excluding numerous expenses. Interest and taxes are tangible costs that affect a company’s financial health. When a company presents “Adjusted EBITDA,” removing additional items, it arguably extends this distortion too far. In my view, such practices excessively detach financial reporting from the company’s actual cash operations.

Comparative Analysis

While earnings provide a comprehensive view of a company’s financial health, including all operational and non-operational expenses, EBITDA and Adjusted EBITDA offer insights into the operational efficiency and core profitability, respectively. The latter metrics are invaluable for comparative analysis across sectors, unaffected by financing decisions and non-operational factors. However, it’s crucial to consider the limitations of each metric, such as EBITDA’s disregard for capital expenditures and Adjusted EBITDA’s potential for subjective adjustments.

My Take as an Analyst

First, earnings per share can present a skewed picture since they don’t equate to actual cash flow. Take, for instance, sales made on credit to customers with dubious creditworthiness—this can pump up earnings without any real influx of cash. Second, EBITDA compounds this issue by stripping away many expenses. But let’s be real: interest and taxes are genuine costs. And then, there’s “Adjusted EBITDA,” which trims away even more, often veering into the territory of excess in my book.Want to keep up to date with all of TDR’s research, subscribe to our daily Baked In newsletter.    

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