Adjusted Adjusted Adjusted EBITDA: Real vs Paper Earnings

Earnings season can make investing feel like a scoreboard. Revenue beat. EPS beat. Record profit. Guidance raised. Green arrows everywhere.

But behind every impressive headline sits a more important question: how good are those earnings?

A company can report a large profit without that profit telling the whole story. That is where reporting quality and earnings quality matter. First, we need to understand the difference before looking at two very different AI examples.

1. What do healthy earnings actually look like?

Before deciding whether earnings are good, investors need to establish whether they can trust the numbers being reported.

Financial statements are designed to reflect the economic reality of a business. Reporting quality asks whether that reality is captured faithfully through appropriate accounting and disclosures.

If reporting quality is poor, earnings quality becomes impossible to assess.

But the reverse is not necessarily true.

A company can have excellent reporting quality and still have poor earnings.

Imagine a retailer whose sales fall, margins compress and profits collapse because consumers are spending less. If management records those weaker results accurately and transparently, the reporting is high quality even though the earnings are poor quality.

Earnings quality asks what those profits tell us about the underlying business. Are they coming from core operations? Are margins sustainable?

Is revenue converting into cash? Are supposedly one-off costs really one-off?

A healthy earnings profile should tell a coherent story from revenue, through operating costs, to profit and eventually cash flow.
Good earnings are not simply big earnings. They are economically credible, sustainable and understandable.

2. How can adjustments change the story?

Now consider Anthropic.

The Claude maker has told investors it expects to report positive adjusted operating income for a second consecutive quarter. On the surface, that is a remarkable milestone for a capital-intensive technology business.

Then comes the small print.

According to the Financial Times, Anthropic’s adjusted operating income excludes stock-based compensation. Its reported gross margin of more than 80% is also calculated before revenue sharing with distribution partners such as Amazon and the cost of training its models.

None of this necessarily means Anthropic is falsifying its financial statements. The issue is investor perception.

If an investor hears “profitable”, the natural assumption is that the business is generating profit after the costs required to operate it. But if important costs are excluded, the definition of profitable becomes much narrower.

This is why an adjustment can be legitimate while still producing a very different headline.

WeWork provides a famous historical example. Its “Community Adjusted EBITDA” went beyond conventional EBITDA by removing growth investments, sales and marketing, pre-opening expenses and general and administrative costs. It demonstrated how far an adjusted profit measure can move from the economics reflected in the full income statement.

The lesson is simple: never stop at “adjusted”. Ask what was adjusted, why and should it really have been adjusted in the first place.

3. What does high-quality earnings look like in practice?

NVIDIA gives us a useful example.

The company keeps beating expectations, but importantly, those profits are not just an accounting trick. NVIDIA is selling an enormous amount of product, making a huge profit, and generating a huge amount of cash.

In its latest quarter, NVIDIA reported $96.2 billion in revenue and $59.7 billion in net income. It also generated $24.1 billion in cash from its operations during the quarter.

That gives investors some confidence that the profit being reported is actually being generated by the business.

There are still things to investigate. For example, NVIDIA has a large amount of money tied up in receivables, meaning customers have bought products but have not yet paid. But overall, the earnings, revenue and cash flow tell a fairly consistent story.

And that is what investors should look for.

When a company reports an earnings beat, don’t just look at the headline EPS number. Ask a few simple questions:

Did revenue actually grow?
Is the company still making money after its normal costs?
Is that profit turning into cash?
And what has management removed from its adjusted numbers?

The goal is to make sure the profit on the page makes sense when you look at the business behind it.

For investors, earnings season is therefore not just about finding the biggest beats. It is about understanding whether the profits being reported reflect the underlying economics of the business. This process can be time-consuming and complicated, which is why equity analysts play an important role.