Non-GAAP Measures & Adjusted EBITDA
Why a company can report a loss under standard accounting rules in one part of its results presentation — and a healthy profit just a few pages later, in the exact same document, using numbers it largely defines itself.
In plain English
Imagine a technology company reports a ₹200 crore net LOSS under standard Ind AS accounting rules for the year. In the same results presentation, it also reports 'Adjusted EBITDA' of ₹150 crore, positive and growing — a company-defined metric that strips out things like ESOP expense, one-off restructuring costs, and other items management considers 'non-core' or 'non-recurring'. Both numbers can be entirely legitimate and useful in their own way — but they answer genuinely different questions, and a reader who doesn't understand the difference can walk away with a wildly inaccurate picture of the company's actual financial health, in either direction.
Words you'll need first
Any financial metric a company presents that is NOT explicitly defined or required by Ind AS itself — Adjusted EBITDA, 'Adjusted Profit', constant-currency revenue growth, and Free Cash Flow are all common examples. These metrics aren't inherently deceptive — many genuinely help investors understand underlying operating performance — but because companies define them THEMSELVES, with real discretion over what gets added back, they require significantly more scrutiny than a standardised, standard-defined accounting figure.
A required disclosure showing the specific, line-by-line adjustments made to get from the nearest STANDARD, Ind AS-compliant figure to the company's own non-GAAP measure. Regulators, including SEBI in India, generally require this reconciliation to be presented clearly and with equal prominence to the non-GAAP figure itself, so a reader can see exactly what was added back or removed.
A worked example, with numbers
| Item | ₹ crore |
|---|---|
| Reported net loss (Ind AS) | (200) |
| + Interest, tax, depreciation & amortisation | 110 |
| = Reported EBITDA | (90) |
| + ESOP expense (non-cash) | 70 |
| + One-off restructuring costs (management-defined) | 90 |
| + Impairment of a discontinued product line (management-defined) | 80 |
| = "Adjusted EBITDA" (company-defined) | 150 |
- The gap between the ₹200 crore Ind AS net LOSS and the ₹150 crore 'Adjusted EBITDA' PROFIT is a full ₹350 crore — almost entirely driven by items the company itself has decided to define as 'non-core' or 'non-recurring'.
- Some of these adjustments are relatively uncontroversial (stripping out interest, tax, depreciation and amortisation is long-established practice) — but others, like excluding ESOP expense entirely (a genuine, real cost, as the Employee Stock Options article explains) or labelling a specific impairment as 'non-recurring', are much more a matter of company judgement.
- The 'one-off' items labelled here as non-recurring deserve particular scrutiny: if a company reports SIMILAR 'one-off' adjustments year after year, they start to look considerably less 'one-off' in substance.
- A reader who focuses ONLY on the flattering ₹150 crore figure, without engaging with the ₹200 crore Ind AS net loss and the full reconciliation, risks a genuinely distorted view — the standard Ind AS figure remains the primary, audited, comparable number.
What it does to the financial statements
Impact on the P&L
- Non-GAAP measures like Adjusted EBITDA are NOT audited to the same standard as the primary Ind AS financial statements and are not subject to the same rigorous, standardised recognition rules — they represent management's own chosen framing of performance.
- Because companies have genuine discretion over what to add back, non-GAAP measures are NOT directly comparable across different companies unless each company's specific reconciliation is carefully checked.
- SEBI's disclosure guidance specifically requires non-GAAP measures to be presented alongside, not instead of, and with no greater prominence than, the nearest equivalent Ind AS measure, along with a clear reconciliation.
- A consistent, meaningful gap between reported Ind AS profit and 'adjusted' metrics, sustained over many periods, is a real signal worth investigating rather than accepting as genuinely one-off.
Impact on the Balance Sheet
- Non-GAAP measures are almost always P&L-focused rather than balance sheet metrics, so they don't typically have a direct balance sheet counterpart.
- However, some ITEMS excluded from non-GAAP profit measures, like large impairment charges, DO have real, permanent balance sheet consequences — a company can present an impairment as 'one-off' while the corresponding reduced asset value remains permanently on its balance sheet.
- Analysts calculating valuation multiples need to be careful about which EBITDA figure is being used, since an inflated, heavily-adjusted EBITDA can make a company appear cheaper than it genuinely is on a comparable basis.
- Recall from the ROCE article that Capital Employed is calculated from standard, Ind AS balance sheet figures — non-GAAP adjustments generally have no bearing on this calculation.
Which standard covers this
In India, the presentation of financial statements is governed by Ind AS 1 and related standards, but non-GAAP or 'alternative performance measures' specifically are addressed through SEBI's separate guidance for listed companies, which requires equal prominence with, and clear reconciliation to, the nearest equivalent Ind AS measure.
How it's recognised globally
Globally, there is no single, universally converged accounting standard specifically governing non-GAAP measures — the IASB has historically focused more on GUIDANCE than a binding standard, similar in spirit to SEBI's approach. The United States has the most formally codified regime: the SEC's Regulation G specifically governs non-GAAP financial measures, requiring reconciliation to the most directly comparable US GAAP measure and prohibiting the non-GAAP figure from being presented with greater prominence — a similar underlying philosophy to SEBI's approach, even though the specific rulebooks differ by jurisdiction.
Real example — Indian listed company
New-age Indian internet and e-commerce companies that listed in recent years, including FSN E-Commerce Ventures (Nykaa), routinely present Adjusted EBITDA and other company-defined metrics alongside their standard Ind AS results, reflecting a broader pattern common across recently-listed technology and consumer internet businesses. For a business with meaningful ESOP expense, genuine investment in newer, loss-making business lines alongside a more mature, profitable core business, an adjusted profitability metric can offer real, additional insight into the direction of the core business beyond what the consolidated Ind AS net profit alone shows. At the same time, precisely because such companies define their own adjustments, careful readers cross-check the specific reconciliation provided against the audited Ind AS figures, exactly as this article recommends.
Where you'll see this
Related concepts
Operating Leverage
Why a 10% jump in a company's sales can sometimes turn into an 80% jump in its profit — and why the same 10% drop can be brutal for the exact same reason.
Financial Leverage
Why borrowing money can make a company's returns to shareholders look spectacular in a good year — and why the exact same borrowing can wipe shareholders out in a bad one.
Return on Capital Employed (ROCE)
Why a company that borrows heavily to boost its Return on Equity can still be a genuinely mediocre business underneath — and why ROCE is the number that catches what ROE alone can hide.