A:

EBITDA, EBITDAR and EBITDARM are analytic indicators commonly used by management to evaluate the financial performance and resource allocation for operating units within a company. These tools are often used within the healthcare industry and also serve as measures of leverage capacity and debt serviceability.

EBITDA, or earnings before interest, taxes, depreciation and amortization, is a commonly used measure of profitability. It is calculated by taking operating income and adding back depreciation and/or amortization. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become widely used in many industries for companies that wish to disclose more favorable numbers to the public.

EBITDAR, or earnings before interest, taxes, depreciation, amortization and rent/restructuring costs, is the same calculation as EBITDA, with the exception that rents and/or restructuring costs are excluded from the expenses. EBITDAR is an especially useful tool for companies undertaking restructuring efforts.

EBITDARM, or earnings before interest, taxes, depreciation, amortization, rent and management fees, is often used by credit rating agencies to assist with comparisons of similar, high debt-carrying companies in order to determine credit ratings. Real estate investment trusts (REITs) and hospitals often lease the spaces they use, meaning rent fees can become a major operating cost.

While EBITDA, EBITDAR and EBITDARM can be useful measures for internal purposes and helpful in conducting multi-company comparisons, they should not be considered measures of financial performance under generally accepted accounting principles (GAAP).

For more on this topic, read EBITDA: Challenging the Calculation and A Clear Look at EBITDA.

This question was answered by Steven Merkel.

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