Non-GAAP financial measures are used by companies to provide investors with a deeper understanding of their results of operation and financial condition. U.S. companies are required to prepare their financial statements in accordance with Generally Accepted Accounting Principles (GAAP). Many companies report non-GAAP financial measures in addition to GAAP metrics because management believes the non-GAAP measures will provide investors with valuable insights and paint a more accurate picture of the company’s unique operational performance.

Non-GAAP financial disclosures are subject to the rules and interpretive guidance promulgated by the Securities and Exchange Commission (SEC). In particular, companies should be familiar with Regulation G and Regulation S-K Item 10(e). These rules require companies to present the most directly comparable GAAP metric with equal or greater prominence. They also require companies to provide a reconciliation table illustrating the differences between the non-GAAP metric and most directly comparable GAAP metric.

One of most frequently used non-GAAP financial measures by companies across a variety of industries is Adjusted EBITDA. EBITDA stands for earnings below interest, taxes, depreciation and amortization. It is a widely used measure of profitability and operating performance for companies. Adjusted EBITDA excludes large one-off costs and other non-recurring items that are not reflective of the company’s normal operations. The most directly comparable GAAP metric is net income. Adjusted EBITDA is calculated as net income excluding certain items.

The Adjusted EBITDA definition is tailored to a particular company’s unique circumstances. Different adjustments will apply to different companies. Typical adjustments include share-based compensation, transaction costs, restructuring charges, severance costs, gain/loss on foreign currency, dividend-related bonuses, lease intangible asset expenses and other items that the company does not consider representative of its underlying operations.

The Adjusted EBITDA reconciliation table will show the most directly comparable GAAP metric, net income, at the top for the relevant time periods. The rows below net income will provide different adjustments for one-time charges and other non-recurring items. The bottom of the table will show the Adjusted EBITDA for the relevant time periods. The Adjusted EBITDA amount is usually larger than the net income amount.

Other common non-GAAP financial measures include the following:

• Adjusted net income: This is calculated as net income attributable to the company minus certain non-recurring items such as restructuring charges and acquisition-related charges.

• Adjusted EBITDA margin: This percentage is simply calculated by dividing the company’s Adjusted EBITDA by its net revenue. The most directly comparable GAAP measure to Adjusted EBITDA margin is net income margin.

• EBIT: EBIT stands for earnings before interest and taxes. Many companies view this as a key measure of profitability. This is calculated as net income attributable to the company excluding interest, taxes and the effects of certain non-recurring items such as restructuring costs and acquisition-related charges.

• Adjusted gross margin: This is calculated as revenue minus certain expenses.

• Adjusted earnings per share: This is calculated by removing certain non-recurring charges from earnings, such as share-based compensation and restructuring charges. The adjusted earnings number is often presented on a per share basis.

• Organic revenues: This is calculated as total revenues excluding the effects of certain non-recurring items such as foreign currency exchange rate fluctuations and net sales from recent acquisitions.

• Free cash flow: This is calculated as cash flow from operations minus capital expenditures.