The city name Adama may have been derived from the Oromo word adaamii, which means a cactus or a cactus-like tree.  More specifically, adaamii means Euphorbia candelabrum, a tree of the spurge family, while hadaamii would mean Indian fig. Following World War II, Emperor Haile Selassie renamed the town after Biblical Nazareth, and this name was used for the remainder of the twentieth century.  In 2000, the city officially reverted to its original Oromo language name, Adama, though "Nazareth" is still widely used.

In 2000, the government moved the regional capital of Oromia from Addis Ababa to Adama, sparking considerable controversy. Critics of the move believed that the Ethiopian government wished to deemphasize Addis Ababa's location within Oromia. On the other hand, the government maintained that Addis Ababa "has been found inconvenient from the point of view of developing the language, culture and history of the Oromo people".

On June 10, 2005, the Oromo Peoples' Democratic Organization (OPDO), part of the ruling EPRDF coalition, officially announced plans to move the regional capital back to Addis Ababa.

The stretched railway from Djibouti to Addis Ababa was the main attributes for the establishment of the city. Adama is one of the major towns came into being with the introduction of the Addis Ababa-Djibouti railway line. Adama was establishedin 1916 at a distance of 99 kilometers southeast of Finfinne (Addis Ababa) in the Great Rift Valley of East Africa.

Since its establishment, Adama is serving as the administrative, commercial, manufacturing & educational hub in the region & served as a distribution center for the surrounding areas as a lively city. Several unreserved & countless efforts have been also made to make the city preferable to investment, residence, trade & industry, build economically & an iconic city with good reputations.

As a result, the city gradually grew from a hamlet into a hub of industries, public administration & trade center with great reputation in the country.According to the information gathered from Adama city land management & development agency, Adama stretches astronomically from 8 ⁰ 33 ¹¹ to 8 ⁰ 36 ¹¹ north latitude &39 ⁰ 11 ¹ 57 ¹¹- 39 ⁰ 21 ¹ 15 ¹¹ longitudes.