Some financial terms have precise, standardised meanings enforced by accounting rules. Others look equally official and have no standard definition at all, meaning each company defines them however it prefers.
The second category includes several of the most widely quoted figures in company reporting. They appear in headlines, get compared across companies, and feed into valuation models, all while meaning materially different things depending on who published them.
This isn’t obscure. It’s documented by standard-setters and regulators, and it affects figures most investors treat as comparable.
Why This Isn’t a Beginner Problem
Lists of investing terms for beginners present definitions as settled, which is right for the terms governed by accounting standards and misleading for the ones that aren’t.
The distinction worth learning early:
- Standardised measures follow accounting rules and are auditable, such as revenue, operating income and net income
- Company-defined measures are constructed by management, such as adjusted earnings and free cash flow
- Hybrid usage, where a standardised term is qualified with an adjective that removes the standard
- Sector conventions, where an industry has settled on a definition that other sectors don’t share
Experienced analysts get caught by the second and third categories regularly, because the labels look identical to the standardised versions.
What the Standard-Setters Found
The problem has been examined formally, and the finding is blunt.
An accounting firm’s summary of recent developments notes that when the standard-setter sought feedback on financial performance indicators, the Board observed that comparability is reduced because standardised definitions of financial KPIs do not exist, listing EBITDA, adjusted EPS, adjusted net income, adjusted operating income and free cash flow among the most common, and reporting that staff research on companies reporting EBITDA found they define earnings, interest, depreciation and amortisation in different ways.
Read that last part again. The four components named in the acronym are themselves defined inconsistently.
So two companies can both report EBITDA, using the same four letters, and be calculating different things from different inputs. Comparing them produces a number that looks meaningful and isn’t.
A Regulator Challenging a Definition
The extent of the latitude shows up clearly in correspondence between companies and their regulator.
In one exchange, staff noted that a company had defined free cash flow as the total of net cash from operating activities and net cash from investing activities, and asked it to consider redefining the measure to the typical calculation of free cash flow, namely cash flows from operating activities less capital expenditures.
The company responded that its disclosure was compliant, since the rules require a clear description of how the measure is calculated rather than adherence to any particular formula.
Both positions are defensible, which is the point. A term with a widely assumed meaning turned out to have no binding definition, only a convention and a disclosure requirement.
Terms Worth Checking Every Time
These carry the highest risk of being misread across companies:
- Free cash flow, where capital expenditure treatment and custom adjustments vary widely
- EBITDA and adjusted EBITDA, where the components themselves differ
- Adjusted earnings, where the list of exclusions is management’s choice
- Organic growth, which depends on how acquisitions and currency are handled
- Net debt, where the treatment of leases and certain liabilities varies
- Recurring revenue, where the definition of recurring is set by the company
Each of these appears in earnings coverage as though it were a standard measure.
How to Read a Definition Properly
The information is disclosed, which means the work is finding it rather than deducing it:
- Locate the definition in the non-GAAP section or the footnotes, where it must be stated
- Read the reconciliation table, which shows exactly what was added or removed
- Compare against the prior year’s definition, since changes happen and must be explained
- Check whether exclusions run both ways, because excluding charges while keeping gains is a known pattern regulators watch for
- Never compare the measure across companies without confirming both definitions match
The fourth point is worth dwelling on. Regulatory guidance specifically flags excluding non-recurring charges while retaining non-recurring gains as potentially misleading, which tells you it happens often enough to warrant naming.
Why Comparability Is the Real Casualty
None of this makes company-defined measures useless. Management often has a genuine case that a standardised figure obscures underlying performance, and the adjusted number can be the more informative one for that specific business.
What breaks is comparison. A measure defined by each company individually can track that company’s own performance over time, provided the definition stays constant, and cannot reliably be compared against a similarly named measure from anyone else.
Which means the practical rule is narrow and easy to apply: use these measures within a company, use standardised measures between companies, and read the definition before doing either.
