What Is EBITDAR?
Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) is a non-GAAP tool used to measure a company's financial performance. Although EBITDAR does not appear on a company's income statement, it can be calculated using information from the income statement.
The Formula for EBITDAR Is
EBITDAR=EBITDA + Restructuring/Rental Costswhere:EBITDA = Earnings before interest, taxes,depreciation, and amortization
What Does EBITDAR Tell You?
EBITDAR is a metric used primarily to analyze the financial health and performance of companies that have gone through restructuring within the past year. It is also useful for businesses such as restaurants or casinos that have unique rent costs. It exists alongside earnings before interest and tax (EBIT) and earnings before interest, tax, depreciation, and amortization (EBITDA).
Using EBITDAR in analysis helps to reduce variability from one company's expenses to the next, in order to focus only on costs that are related to operations. This is helpful when comparing peer companies within the same industry.
EBITDAR doesn't take rent or restructuring into account because this metric seeks to measure a company's core operational performance. For example, imagine an investor comparing two restaurants, one in New York City with expensive rent and the other in Omaha with significantly lower rent. To compare those two businesses effectively, the investor excludes their rent costs, as well as interest, tax, depreciation, and amortization.
Similarly, an investor may exclude restructuring costs when a company has gone through a restructuring and has incurred costs from the plan. These costs, which are included on the income statement, are usually seen as nonrecurring and are excluded from EBITDAR to give a better idea of the company's ongoing operations.
- EBITDAR is a profitability measure, like EBIT or EBITDA, but it's better for casinos, restaurants, and other companies that have non-recurring or highly variable rent or restructuring costs.
- EBITDAR gives analysts a view of a company's core operational performance apart from expenses unrelated to operations, such as taxes, rent, restructuring costs, and non-cash expenses.
- Using EBITDAR allows for easier comparison of one firm to another by minimizing unique variables that don't relate directly to operations.
Example of How to Use EBITDAR
EBITDAR is most often calculated for internal purposes only, as it is not a required financial reporting metric for public companies. A firm might calculate it each quarter to isolate and review operational expenses without having to consider fluctuating costs such as restructuring, or rent costs that may differ within various subsidiaries of the company or among the firm's competitors.
The starting point is earnings before interest and tax (EBIT), also referred to as operating income. This metric excludes interest and taxes. The next step is to exclude costs associated with depreciation, amortization, rent or restructuring, to arrive at EBITDAR.
For example, imagine the XYZ company earns $1 million in a year, and it has $400,000 in total operating expenses. Subtracting operating expenses from revenue results in $600,000 of EBIT, or operating income ($1 million revenue - $400,000 operating expenses) = $600,000.
The operating expenses do not include interest and tax expenses, as the company chooses to show them further down on the income statement, after EBIT.
Included in the firm's $400,000 operating expenses is depreciation of $15,000, amortization of $10,000, and rent of $50,000. To arrive at EBITDAR, an analyst excludes depreciation, amortization and rent ($15,000 + $10,000 + $50,000) from the calculation by starting with EBIT and adding back the amounts as follows:
- EBITDAR = $600,000 EBIT + ($15,000+$10,000+$50,000) = $675,000
Note that rent is excluded for the EBITDAR metric only.
The Difference Between EBITDAR and EBITDA
The difference between EBITDA and EBITDAR is that the latter excludes restructuring or rent costs. However, both metrics are utilized to compare the financial performance of two companies without considering their taxes or non-cash expenses such as depreciation and amortization. When a business amortizes or depreciates an asset, it writes off a portion of the asset's cost each year over the course of several years, although it may have actually paid for the asset all in one year.
While essential for tax returns and accounting ledgers, these numbers may cloud the picture of a business's current financial state. As a result, investors want to consider the performance of a company without taking non-operational expenses into account as they may look quite different from one company to the next.