EBITDAR

EBITDAR
See also
Adjusted ebitda Gross Income Multiplier Capital gearing Normal cost Du Pont formula Asset based approach Non operating asset Plowback Ratio Commercial facility

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.

${\frac {EBITDAR}{Revenue}}=EBITDARMargin$

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).

References

• Brock, J. (2014) Restaurant Valuation Appraisal Journal. Spring 2014, Vol. 82 Issue 2, p 118-125. 8p.
• Horan, H. (2017) Will the Growth of Uber Increase Economic Welfare 44 Transp. L.J., 33-105 (2017), p 6-8
• Klauber, J., Geraedts, M., Friedrich, J., (2015) Hospital Report 2015, p 245
• Mielcarek, J. (2015) EBITDA jako podstawa rachunku kosztów docelowych Prace Naukowe Uniwersytetu Ekonomicznego we Wrocławiu, 2015, Issue 398, p 343-353
• Parker, L., Grant, J. (2002) EBITDA! Research in Accounting Regulation, Vol. 15, Part III, p 205-209
• Sui, Y. (2017). The Research on the Applications and Limitations of EBITDA. DEStech Transactions on Environment, Energy and Earth Sciences, (icseep).

Author: Krzysztof Kędys