How to Read Non-GAAP Metrics Critically (Adjusted EBITDA and Friends)

Almost every TSX company reports at least one number that isn’t defined by IFRS: adjusted EBITDA, adjusted EPS, core earnings, distributable cash flow, FFO, AFFO, all-in sustaining cost. Some of these are genuinely more useful than the IFRS figure. Others exist mainly to make the quarter look better. Your job is to tell the difference.

Educational only — not financial advice. Examples are hypothetical.

Direct answer

Non-GAAP measures are fine if you read the reconciliation. Find the bridge from the IFRS number, list every adjustment, and ask: is this truly non-recurring, non-cash, or outside the core business? Track the adjustments over three years. If the same “one-time” items recur, or the gap between adjusted and IFRS keeps widening, discount the adjusted figure.

What Canadian rules require

National Instrument 52-112 (in force since 2021) sets disclosure rules for non-GAAP and other financial measures in Canadian documents:

Requirement	What it means for you
Clear label	The measure must not be called something misleading (e.g. “net income”)
Equal or less prominence	The IFRS measure must be at least as prominent
Reconciliation	A quantitative bridge to the most directly comparable IFRS measure
Explanation	Why management thinks the measure is useful
Comparative period	Shown for the prior period too
Composition	What’s included or excluded

These protect you only if you use them. The reconciliation is usually in the MD&A, often near the end — see how to read an MD&A.

The common family of measures

Measure	Typical users on the TSX	What it tries to show	Watch out for
Adjusted EBITDA	Pipelines, telecom, industrials	Operating earnings before capital structure	Ignores capex and leases; “adjustments” creep
Adjusted EPS / core EPS	Banks, insurers, industrials	Earnings ex one-offs	Recurring “one-offs”; amortization of acquired intangibles excluded
Distributable cash flow (DCF)	Midstream	Cash available to pay distributions	Definitions vary between peers
FFO / AFFO	REITs	Property cash earnings	AFFO maintenance capex assumptions differ
AISC	Gold miners	Cost to sustain production per ounce	Excludes growth capex and some overheads

Sector context: midstream, REITs, gold.

Rebuild the bridge (hypothetical)

Adjustment	$M	Legitimate?	Question to ask
Share-based compensation	+25	Questionable	It’s a real cost paid in shares — does dilution show up?
Restructuring	+30	Depends	Was there restructuring last year too? And the year before?
Acquisition costs	+15	Depends	Is acquiring companies the strategy? Then it’s a business cost
Impairment	+10	Usually yes (non-cash)	But it signals past capital was overpaid

Legitimate vs suspicious adjustments

Usually reasonable to exclude	Be skeptical when excluded
Gains/losses on asset sales	Restructuring charges that recur every year
Non-cash impairments (note them separately)	Stock-based compensation
Unrealized FX or derivative mark-to-market	“Integration costs” for a serial acquirer
Legal settlements that are truly unusual	Inventory write-downs in a cyclical business
Acquisition accounting (for comparability)	Costs labelled “strategic” or “transformation”

The 3-year bridge check

	Year 1	Year 2	Year 3
IFRS measure
Total adjustments
Adjustments as % of IFRS measure
Same items recurring?

Fill this for any company you own. A rising percentage is a warning sign even if each adjustment sounds reasonable.

How this changes your valuation

If you value a company on adjusted EBITDA, the multiple you pay is only as honest as the adjustments. In the hypothetical above, an EV/EBITDA of 10× on adjusted EBITDA (380) becomes about 12.7× on unadjusted EBITDA (300). More in what EV/EBITDA means for Canadian DIY investors. Cash-based cross-checks like free cash flow and P/FCF are harder to adjust away.

Media credits

• Hero: “Tour de la Bourse Montreal 07.JPG” by Jeangagnon, CC BY-SA 3.0, via Wikimedia Commons. Cropped and resized to 1280×720. Real photograph, not AI-generated.

By Andrew · stocksummarizer.com