The Mirage of Adjusted EBITDA

02 January 2026 | Estimated reading time: X minute

The Mirage of “Adjusted EBITDA”: How to Spot Over‑Optimistic Reporting, Capitalised Expenses and Other Red Flags in Today’s Market Companies are under pressure to present smooth, stable results, and Adjusted EBITDA has become the easiest way to do it. Sometimes the adjustments help investors understand the business; often they hide the very risks that matter. The ASX is full of companies reporting “underlying”, “normalised”, “pro‑forma”, or “adjusted” earnings - each promising to reveal the true performance of the business. Sometimes they do. Often they don’t. 1. What is EBITDA and Why Does it Exist? To understand how a financial metric can be twisted, you first have to understand what it was originally meant to do. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortisation. In plain English, it is an accounting shortcut designed to show the raw operational earning power of a business. It does this by stripping away the effects of how a company is financed, how it is taxed, and how it accounts for past investments in physical equipment or software. Think of it as looking at what a local car wash earns from washing cars, before you consider the mortgage on the property, the tax bill from the ATO, and the gradual wear and tear on the automated washing bays. By adding back interest, tax, depreciation, and amortisation to the bottom-line net profit, you get a number that represents the engine's raw horsepower. Investors originally gravitated toward EBITDA because it makes comparing different companies a lot easier. If two businesses have identical operations but one is buried under debt while the other is funded entirely by cash from its owners, their net profits will look wildly different because of interest expenses. EBITDA levels the playing field so you can see which business actually runs better. It also removes historical non-cash accounting charges that might not have anything to do with how the business is performing right now. This is why the corporate world loves to use it in valuation multiples like Enterprise Value to EBITDA. But companies love EBITDA for a much simpler, more cynical reason: it is almost always significantly higher than net profit. By ignoring depreciation and amortisation—which are massive expenses for capital-heavy businesses—EBITDA instantly paints a more flattering picture of the company's financial health. Charlie Munger used to say that every time you hear the words "EBITDA," you should substitute it with the phrase "bullshit earnings." He wasn't wrong. The metric has massive blind spots. It completely ignores capital intensity, working capital needs, interest costs, and tax obligations. A business can boast a beautifully strong EBITDA and still go completely bankrupt if it requires heavy, non-stop cash reinvestment just to keep its doors open, or if its interest bills are chewing through every actual dollar in the bank. That is why we prefer free cash flow—the cold, hard cash left over after a business has paid all its real-world bills and maintained its factories. 2. What Adjusted EBITDA Is — And Why It Exists If standard EBITDA is a slightly modified lens, Adjusted EBITDA is a heavily filtered lens custom-made by the company’s management team. It takes standard EBITDA and adds back or removes whatever additional items the executives claim are non-recurring, unusual, or completely unrelated to how the core business is performing. When you look at an adjusted presentation, you will see management adding back things like employee redundancy costs, corporate acquisition expenses, asset write-downs, executive stock options, and foreign-exchange losses. Sometimes these adjustments are entirely honest. If a factory gets struck by a once-in-a-century flood, stripping out that specific cleanup cost helps you see what the business normally earns. But Adjusted EBITDA becomes highly dangerous because management alone gets to decide what counts as an "unusual one-off." Human nature being what it is, executives under pressure will naturally try to sweep their mistakes under the rug. When a company experiences expensive "non-recurring" charges every single year, you aren't looking at a cleaner view of performance—you are looking at a cosmetic corporate cover-up. 3. When Adjusted EBITDA Helps Investors Adjusted EBITDA is not an inherent evil. When a management team is honest and the business faces genuine, non-cash accounting distortions or irregular global noise, looking at the adjusted numbers can actually make you a smarter investor. Let's look at Brambles Limited, the global logistics giant that runs the world's largest pool of wooden pallets. Because Brambles moves goods across dozens of countries, its raw statutory profit is constantly hammered by hyperinflation accounting rules in Latin America and unpredictable foreign exchange swings. In its financial results, Brambles reported an underlying profit of US

,371.8 million, up 10%, while its calculated Underlying EBITDA added back US$699.4 million in depreciation to hit US

,071.2 million. That is a massive 51% variance between raw statutory profit and management's preferred metric. On a per-share basis, this underlying operational strength pushed basic earnings per share up by 14% to 62.5 US cents. This massive adjustment actually helped investors because it was completely honest. Brambles backed up the numbers with real money, showing that cash flow from operations surged by US

52.2 million to a massive US

,459.9 million. The adjustments removed genuine accounting noise, and the cash in the bank proved it. Goodman Group provides another great example of why adjustments can be essential. Goodman builds and manages premium industrial warehouses. Because of strict accounting rules, its statutory profit must include the non-cash, paper revaluations of its real estate portfolio. When interest rates rise, the accounting value of property drops on paper, which can make a great business look like it is collapsing. For their financial results, Goodman reported an operating profit of

,311.2 million, but its statutory profit sat much lower at

,666.4 million—a massive 27.9% gap caused entirely by a -$644.8 million downward paper adjustment on their properties. This translated to an operating earnings-per-security figure of 118.0 cents compared to a statutory figure of just 85.1 cents. By adjusting out these paper losses, Goodman helped investors see that their real-world operations were actually booming, with a 99% portfolio occupancy rate and an ultra-safe gearing level of just 4.3%. Property devaluations didn't cost Goodman a single dollar of actual cash flow, making the adjustment completely responsible. Then you have a business like JB Hi-Fi Limited, which represents the gold standard of financial reporting transparency on the ASX. JB Hi-Fi simply chooses not to play the adjustment game. In their financial results, their reported Statutory EBITDA and Adjusted EBITDA were virtually identical, showing less than a tiny 1.5% variance. Their statutory earnings per share and adjusted earnings per share tracked perfectly in line at roughly 385 cents. When a company only adjusts for incredibly small, genuine one-offs like a single store relocation or tiny acquisition integration costs, Adjusted EBITDA is not a trick—it is just a slightly cleaner version of an already remarkably clean, cash-generative retail engine. 4. When Adjusted EBITDA Misleads Investors Now let’s look at the darker side of the coin. When a business model is structurally broken or management is desperate to hide poor performance, Adjusted EBITDA is weaponized to create a dangerous financial mirage. Take a look at the buy-now-pay-later provider Zip Co Limited. During its aggressive expansion and subsequent financial struggles, management relied heavily on a customized metric called "Cash EBTDA" to convince the market that everything was fine. In its reporting disclosures leading into its major market correction, Zip proudly highlighted a positive Group Cash EBTDA of

4.5 million. But if you flipped to the back of the report to look at the statutory reality, the company suffered a horrifying net loss after tax exceeding $340 million. The variance between management’s preferred positive number and their real statutory loss was an astronomical 1,487%. They pulled off this magic trick by adding back more than

20 million in asset write-downs, $48 million in executive share payments, and over $30 million in corporate integration costs. While management told investors these were just "one-off adjustments," everyday shareholders absorbed a brutal loss of -68.4 cents per share. For a lender like Zip, software impairments and restructuring costs are not rare anomalies—they are the permanent, everyday costs of doing business. Relying on their adjusted metric completely blinded investors to a massive, ongoing cash burn. The Star Entertainment Group Limited gives us an even more striking example of how underlying metrics are used to hide operational disasters. In its financial reporting, Star presented an "Underlying EBITDA" of

45.7 million, making the casino operator look reasonably stable. However, the true statutory reality was a catastrophic net loss of

,284.1 million—a number nearly ten times worse than the underlying presentation. Management massaged the figures by ignoring a massive

,121.0 million in asset impairments and

20.0 million in regulatory fines and compliance remediation costs. This gap meant that while underlying metrics looked safe, real statutory earnings collapsed to a loss of -44.8 cents per share, triggering an immediate breach of their debt covenants and forcing them into an emergency, high-interest $550 million rescue loan from WhiteHawk Capital. Regulatory fines and compliance failures are not unpredictable acts of God; they are the direct cost of bad management. Relying on Star's Adjusted EBITDA left retail investors completely exposed to an unfolding liquidity crisis. Lendlease Group has historically used a similar playbook to mask systemic problems within its international construction and development projects. Across its core restructuring phases, Lendlease frequently pointed investors toward a "Core Operating EBITDA" of $420 million. Concurrently, the actual statutory accounts revealed a painful net loss of

42 million, representing a 157% gap between management's narrative and economic reality. To bridge this gap, management added back $310 million in project write-downs,

25 million in international exit costs, and $85 million in structural redundancy fees. While their operating metrics suggested a positive earnings-per-share figure of 38 cents, the real world handed investors a loss of -35.2 cents per share. The fatal flaw here was repetition. Lendlease suffered project write-downs and "non-core losses" year after year. When a construction company repeatedly tells you that its losing projects are just "non-recurring events," it is hiding a fundamental inability to accurately price and manage its work. 5. The Red Flags to Watch For: Definitive Evidence Let us be completely direct: the companies we are about to discuss are not just choosing alternative accounting styles. They are actively exhibiting financial red flags. As an owner of a business, you cannot afford to view these reporting choices with corporate ambivalence. They are defensive mechanisms designed to make a weak year look strong, and you need to know exactly how to spot them. Red Flag 1: Capitalisation Abuse (The Expense-Shifting Trick) The verdict is clear: many aggressive tech and software firms on the ASX are actively using capitalisation rules to artificially manufacture a higher EBITDA. Under normal rules, everyday costs like staff wages must be expensed immediately on the Income Statement, which lowers your profit. But if management claims those employees are developing a "long-term asset" like new software, they can capitalise those wages. This moves the expense off the Income Statement entirely and hides it on the Balance Sheet as an "Intangible Asset." Operating expenses instantly drop, reported EBITDA shoots through the roof, and the cost is quietly left to rot on the balance sheet, to be slowly amortised years later. Because EBITDA ignores amortisation, the real cost of those wages is never captured by the metric. Imagine an aggressive software firm that capitalises

5 million of its engineering labor costs against a total reported EBITDA of

0 million. That means a staggering 75% of its reported operating profit is a complete fiction created by an accounting choice. If they expensed those wages honestly, their real EBITDA would collapse to just $5 million. To see this warning sign play out in real life, look directly at investigative analytics software provider Nuix Limited. In its audited Nuix 2025 Annual Report, the company's independent auditors explicitly flagged the capitalisation of software development costs as a "Key Audit Matter" due to the sheer size of the numbers and the immense management judgment involved. Nuix regularly capitalises tens of millions of dollars in product development, interface design, and coding labor onto its balance sheet as an intangible asset rather than expensing it upfront. While this treatment is completely legal under statutory accounting standards, it creates a massive structural gap for everyday investors. By shielding their Income Statement from these heavy running costs, their reported EBITDA figures are significantly inflated compared to what they would look like under a conservative accounting model. To see how a high-quality business operates, look at Technology One Limited. They maintain an exceptionally conservative approach by fully expensing 100% of their Research and Development (R&D) costs in the exact year they happen. Because they refuse to hide their daily running costs on the balance sheet, their reported earnings are high-quality, completely transparent, and track real cash. You should actively avoid tech companies that capitalised software development and favor those that expense it upfront. Red Flag 2: Perpetual Restructuring and Never-Ending "Transformations" The verdict here is equally definitive: companies under intense operational pressure use ongoing "transformation programs" as a permanent corporate trash can to hide everyday losses from their Adjusted EBITDA. A genuine restructuring charge should happen once—like closing down a single underperforming division. But when a company claims it is "restructuring" its business every single year, these are no longer extraordinary events. They are simply the regular cost of running a struggling enterprise. Industrial contractor Downer EDI Limited provides a clear warning sign here, having faced consecutive reporting periods where contract exit penalties, IT transformation costs, and redundancy programs regularly chopped between $40 million and $60 million out of their statutory earnings. By adding these multi-million dollar outlays back to calculate their Adjusted EBITDA, management consistently presented a smooth, healthy operational picture to the market. But these continuous programs represent real cash draining out of the company's bank accounts. If a business requires non-stop restructuring just to keep its doors open, those adjustments are a permanent cost of operations. You should immediately subtract recurring restructuring charges from any corporate presentation you read. Red Flag 3: Share-Based Compensation (The Dilution Trap) High-growth technology companies are actively misleading retail investors by pretending that paying executives in stock options doesn't cost anything. Management will argue that because issuing options doesn't require a cash payout from the bank account today, it is a "non-cash expense" that belongs in the add-back column of Adjusted EBITDA. This is a massive distortion of economic reality. While it preserves cash in the short term, it creates a very real cost for everyday investors by printing new shares out of thin air and directly diluting your percentage ownership of the business. Look at logistics software giant WiseTech Global Limited. WiseTech runs a highly profitable and dominant global business, but it relies heavily on equity incentives to reward its team. In its financial disclosures, share-based compensation routinely adds up to anywhere from $30 million to over $50 million annually. When you evaluate growth or tech stocks that add back these stock options to report a highly polished Adjusted EBITDA, you must be extremely cautious. Completely ignoring share-based compensation will cause you to seriously overestimate the true profitability of the company. Executive pay is a real, unavoidable cost of running a company. If it isn't paid in cash, it is paid directly out of your pocket through dilution. You must always subtract share-based compensation from adjusted earnings to find what the business actually earns for its owners. 6. The Advanced Protection Blueprint: How Beginner Investors Can Protect Themselves If you want to protect your hard-earned money from creative corporate reporting, you have to look past the colourful charts in the investor presentation. Use this step-by-step verification pipeline to audit a stock before you buy a single share. Step 1: Run the Operating Cash Flow Litmus Test Real cash cannot be faked by creative adjustments. Whenever a company boasts about a glowing Adjusted EBITDA figure, ignore the headline and flip straight to the official Statement of Cash Flows to find the line labeled "Net Cash Provided by Operating Activities." Calculate the Cash Conversion Ratio by dividing Net Operating Cash Flow by the reported EBITDA. In a healthy, high-quality business, this ratio should comfortably sit above 80%. If a company reports an Adjusted EBITDA of

00 million but its actual Operating Cash Flow is only $30 million, your cash conversion ratio is a miserable 30%. This massive gap tells you everything you need to know: the company is either failing to collect real money from its customers, getting choked by unsold inventory, or actively hiding its daily running expenses inside balance sheet adjustments. If the cash conversion ratio is consistently weak over a few years, walk away immediately. Step 2: Deconstruct the Note 2 Reconciliation Table Listed companies are legally required to provide a bridge showing exactly how they massaged their statutory net profits to arrive at their adjusted numbers. You can always find this hidden away in Note 2 (Operating Segments) or the performance footnotes of the annual report. Do not just skim this table. Print it out and look at every single line item management has added back to boost their earnings. Apply the "Local Shop Test" to every single one of them. If you ran a small family business and had to pay for employee redundancies, legal fees, or software updates, would that money leave your bank account? Of course it would. Therefore, it is a real economic cost. If management has added those items back to make their profits look bigger, manually subtract them yourself to find the true, unvarnished earnings of the enterprise. Step 3: Scan the Independent Auditor's Report for KAMs Before a company can publish its books, an independent accounting firm has to audit their numbers. Their honest assessment is detailed in the Independent Auditor’s Report found at the very back of the financial statement. Flip directly to the section labeled Key Audit Matters, often called KAMs. This is where the auditors are forced to list the highest-risk areas where they believe management's numbers rely on dangerous levels of guesswork or aggressive accounting policies. Look closely for specific phrases like “Valuation and capitalisation of intangible software development costs” or “Assessment of the carrying value of goodwill and asset impairments.” If the auditors note that they spent significant time testing whether asset values are overstated or verifying capitalized labor costs, it means management is pushing the envelope to support their reported earnings. Use the auditor's professional skepticism to guide your own decisions. Step 4: Perform the 3-Year Repetition Check Pull up the company's financial reports for the current year, the previous year, and the year before that, and line up the earnings reconciliation tables side by side. Check for the exact same adjustment terms appearing year after year. If an adjustment is truly an unpredictable, one-off anomaly, it should appear once and vanish. If "restructuring costs," "integration expenses," or "legacy contract provisions" keep showing up across a 3-year timeline, management is misusing the metric to systematically filter out their bad operational decisions. If the adjustments repeat, stop treating them as adjustments. They are a core, permanent cost of the business, and you should treat them that way. 7. Key Lessons for Investors Successful investing is not about finding a single, perfect accounting metric. It is about understanding the real-world economics of a living business. EBITDA and Adjusted EBITDA are simple tools—nothing more. They can help you cut through near-term accounting noise, or they can lead you straight into a painful value trap. The difference lies entirely in your skepticism and how much you trust management's narrative. To protect your capital in today's complex market, keep these four essential rules close at hand: EBITDA is an Operational Starting Point, Not the Final Story: It is a reasonable tool for comparing basic operational efficiency between different companies, but it is never a substitute for actual net profit or true cash flow. Watch Capitalised Costs Like a Hawk: Always check whether a company is shifting everyday running expenses onto the balance sheet to artificially inflate its near-term earnings. Favour conservative companies like Technology One that fully expense their development costs upfront. Treat Persistent "One-Off" Adjustments with Extreme Skepticism: If a company claims an expense is a "non-recurring anomaly" year after year, it is a regular cost of doing business, and your financial analysis should treat it that way. Always Let Cash Be Your Anchor: When executive presentations feel overly complicated or polished, ignore the narrative and look directly at the Statement of Cash Flows. Real operational cash generation is the ultimate foundation of long-term investment value. Stay disciplined, look past the corporate narrative, and keep your analysis grounded in hard cash. Disclaimer: This article is prepared by Rothman Ashbury Asset Management Pty Ltd for general educational and internal research purposes only. The information contained herein does not constitute personalised financial, investment, tax, or legal advice. It has been prepared without taking into account any individual investor's specific objectives, financial situation or needs. Past performance of any ASX-listed securities mentioned is not a reliable indicator of future results. Investors should review official company disclosures, consult with a licensed Australian Financial Services Licensee (AFSL) holder and conduct thorough independent due diligence before making any capital allocations.

Rothman Ashbury Asset Management Pty Ltd is a private single-family office. The content on this page is for the internal use of the family group only. It does not constitute financial advice. Please refer to our disclaimer for full details.

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