EBITDAR

From CEOpedia | Management online

The EBITDAR is a business key figure that gives an indication of the operating result of a company.

Definition

EBITDAR is the abbreviation for English: earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs. This means " Earnings before interest, taxes, depreciation on property, plant and equipment and amortization of intangible assets and rent or restructuring costs ". It is thus a description of operational performance before capital expenditure (operating profit). It is a further development of the consideration of an adjusted EBITDA for the success assessment (J. Mielcarek, 2015)

The simplest method of calculation is:

EBIDTAR = revenue - expenses

That equation can have some limitation. In some companies expenses may include restructuring costs or rent costs. Therefore, you should check whether that simple equation will work as you wish.

The sustainable EBITDAR comprises the operating result, which does not include the expenses (rents, interest and depreciation) required for the assets used and is also adjusted for extraordinary and off-period expenses and income. EBITDAR is a variation of other financial performance measures: EBIT and EBITDA. EBIT is an operating income, which excludes taxes and interest. It is lower than EBITDA and EBITDAR (G.Previts, 2002) The company could gone over restructuring plan or operate at different cost levels. Investors who compare companies, e.g. in portfolio, may want to exclude depreciation and amortization or even restructuring of rent costs. Then those modified indicators come into use.

Application

The EBITDAR is of greater importance for real estate investment companies, hotels, restaurants, hospitals and nursing homes with leasing contracts for their real estate or when the buildings are not owned and rented. Since rent is also a cost of capital, it is equivalent to the "normal" interest on debt and equity (J. Klauber, M. Geraedts, J. Friedrich, J. Wasem, 2015)

Among other things, it is used as a key performance indicator in company controlling, in company valuation, and in assessing the creditworthiness of companies in certain sectors. Due to the limited informative value, additional key figures are often taken into account. EBITDAR can be useful when comparing two companies in the same industry with different structures of their assets - for example, when considering two nursing home companies: one company rents its nursing homes and the other owns its homes and thus does not pay rent but has instead, capital expenditures that are not necessarily of the same order of magnitude as depreciation. Looking at EBITDAR, one can compare the efficiency of operations without regard to the structure of their assets. The profit size is not regulated by the accounting standard GAAP (H.Horan, 2017)

EBITDAR margin

The EBITDA Margin is the ratio of EBITDAR to revenue (EBITDAR divided by revenue). Whether the EBITDAR margin makes a meaningful statement is controversial and also depends very much on the nature of the business.

Breaking down EBITDAR

Another way of determining a business's earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) is to calculate revenue minus expenses. This calculation will exclude interest, taxes, depreciation, amortization, and restructure or rent costs. Depending on the company and the goal of the analyst, the indicator can either include restructuring costs or rent costs, but usually not both (Rule, Brock J., 2014)

EBITDAR is a metric used primarily to analyze the performance of companies that have gone through restructuring. It is also useful for businesses such as restaurants or casinos who have unique rent costs. It exists alongside earnings before interest and tax (EBIT) and earnings before interest, tax, depreciation, and amortization (EBITDA).

Examples of EBITDAR

  • The EBITDAR of a hotel is calculated by adding the hotel's Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to the hotel's rental payments.
  • The EBITDAR of a retail store is calculated by adding the store's Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to the store's rent payments for the space it occupies.
  • The EBITDAR of a restaurant is calculated by adding the restaurant's Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to the restaurant's rent payments for the space it occupies.
  • The EBITDAR of an airline is calculated by adding the airline's Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to the airline's rent payments for the aircraft and other leased assets it uses.
  • The EBITDAR of a manufacturing company is calculated by adding the company's Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to the company's rent payments for the factory and other leased assets it uses.

Advantages of EBITDAR

EBITDAR provides a comprehensive view of a company's operating performance, with several advantages:

  • It eliminates the effect of financing decisions on the bottom line, making it easier to compare businesses of different sizes and financial structures.
  • It allows for the comparison of companies with different levels of debt and different capital structures.
  • It helps to isolate the effects of non-operating items, such as taxes, interest, or depreciation, making it easier to assess the operational performance of the business.
  • It helps to identify and measure the sustainability of operating performance.
  • It helps to identify sources of operating cash flow.
  • It is also useful for evaluating potential acquisitions and investments.

Limitations of EBITDAR

EBITDAR is a useful tool for understanding a company's operating results, however, it is important to be mindful of its limitations when interpreting the results. These limitations include:

  • The EBITDAR figure does not factor in the cost of capital, such as interest expenses on debt, which can significantly affect the profitability of a business.
  • EBITDAR does not include non-operating income, such as investment gains and losses, which can also have a significant impact on a company's financial performance.
  • EBITDAR does not consider the cost of depreciation, which is a necessary expense for many businesses.
  • EBITDAR does not provide an indication of cash flow. It is important to consider cash flow when evaluating a company's financial performance.
  • EBITDAR does not take into account equity investments, which can have a significant effect on the overall financial performance of a company.

Other approaches related to EBITDAR

EBITDAR is not the only measure of a company's operating performance. There are other approaches that can also be used to assess the financial health of a business. These include:

  • EBIT (Earnings Before Interest and Tax): This is an indicator of a company's profitability, as it measures the amount of profit generated before interest and taxes are deducted.
  • EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization): This is an indicator of a company's financial performance, as it measures the amount of profit generated before interest, taxes, depreciation and amortization are deducted.
  • EVA (Economic Value Added): This is an indicator of a company's value added, as it measures the difference between a company's operating profit and its cost of capital.
  • Free Cash Flow: This is an indicator of a company's financial strength, as it measures the amount of cash that is generated from operations after deducting capital expenditures.

In summary, EBITDAR is one of several measures that can be used to assess the financial performance of a company. Other approaches include EBIT, EBITDA, EVA and Free Cash Flow.


EBITDAR — recommended articles
Underlying Profit — Berry Ratio — Adjusted ebitda — Du Pont analysis — Return on sales — Return on net assets — Solvency ratios — Fixed-Charge Coverage Ratio — Basic earnings power

References

Author: Krzysztof Kędys

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