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.
- EBITDAR is a profitability measure like EBIT or EBITDA that adjusts net income to be internally analyzed by removing certain costs.
- It's better for casinos, restaurants, and other companies that have non-recurring or highly variable rent or restructuring costs as these expenses are taken out of net income.
- 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.
- EBITDAR may unjustly remove controllable costs which may not hold management accountable for some costs incurred.
Formula and Calculation of EBITDAR
EBITDAR can be calculated in several different ways. Because EBITDA is a heavily used financial calculation, the most common way is to add restructuring and/or rental costs to EBITDA:
EBITDAR=EBITDA + Restructuring/Rental Costswhere:EBITDA = Earnings before interest, taxes,depreciation, and amortization
Different approaches to calculating EBITDAR may start with different earnings or income calculations. In general, the earnings portion refers to net income. This is the all-inclusive, non-restrictive earnings that a company has made in a given period that is not yet adjusted for any items below.
Interest expense is the cost incurred for securing a debt or line of credit with an outstanding balance. A company may choose to eliminate this cost because it may not be controllable by management. In addition, it may be strategically advantageous to have opted to finance something using low-cost debt instead of relying on internal capital or higher-cost methods such as issuing equity shares.
Tax expense is the cost imposed on a company for local, state, or federal taxes. Because a company often does not have a say in its tax assessment, it may be removed for internal analysis. However, companies also have the discretion of forming favorable legal structures to help minimize its tax assessment. Some may argue that if a company fails to strategically plan its future tax liability, it should be held accountable for the taxes assessed when analyzing financial results internally.
Depreciation is the allocated cost of a tangible asset over its useful life. Though a company may outright purchase an asset, it will likely not receive the benefit of the asset all at one time but instead over a period of time. Although there are different depreciation rates and methods, a company may have much control over how depreciation impacts their net income calculation. In addition, companies may not care to see such non-cash transactions when analyzing results.
In a very similar manner as depreciation, amortization is the spreading of costs over the useful life of an asset. However, amortization occurs for intangible assets such as trademarks, patents, and goodwill. The benefit of these items is received over time; however, the worth theoretically deteriorates over time and they become less valuable as they are used or competitors make them obsolete. Just like depreciation, amortization is a non-cash, uncontrollable expense that management may not care to analyze.
Restructuring or Rental Costs
The element that makes EBITDAR different from other calculations is the elimination of restructuring costs or rental costs. These costs may not yield financial results comparable with other companies or comparable for a single company across a period of time. For certain industries and sectors, it may be more favorable to remove these costs when analyzing financial results for reasons discussed below.
EBITDAR is an internal analysis tool only. Though it may be discussed within the notes to a company's financial statements, companies are not required to publicly disclose their EBITDAR calculations.
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 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.
Imagine Company XYZ earns $1 million in a year in revenue and incurs $400,000 in total operating expenses. Included in the firm's $400,000 operating expenses is depreciation of $15,000, amortization of $10,000, and rent of $50,000. The company also incurred $20,000 of interest expenses and $10,000 of tax expenses for the period.
Company XYZ can begin by calculating its net income. This is the total amount of revenue less the total amount of expenses.
Net Income = $1,000,000 Revenue - $400,000 Operating Expenses - $20,000 Interest - $10,000 Taxes = $570,000
Company XYZ can then back into EBIT by adding back interest and taxes.
EBIT = $570,000 Net Income + $20,000 Interest + $10,000 Taxes = $600,000.
Company XYZ can further back out additional costs to arrive at EBITDA.
EBITDA = $600,000 EBIT + $15,000 Depreciation + $10,000 Amortization = $625,000
Last, Company XYZ can reincorporate rental costs to arrive at EBITDAR.
EBITDAR = $625,000 EBITDA + $50,000 Rental Expenses = $675,000
EBITDAR can be calculated many different ways. For example, if you know EBITDA, you can simply add restructuring or rent costs. As another example, if you know EBIT, just add back depreciation, amortization, and restructuring/rent costs. The ultimate calculation across all different methods should be the same.
Advantages and Limitations of EBITDAR
Advantages of EBITDAR
EBITDAR is more useful than other financial calculations in several different situations:
- EBITDAR removes one-time restructuring costs. As these expenses are often non-recurring, it is less useful to analyze earnings after these one-time costs.
- EBITDAR makes certain companies more comparable. By removing rental costs, it becomes more reasonable to compare the operations of different companies without discrepancies arising based on whether the company owns its assets or not.
- EBITDAR adjusts for geographical regions with higher costs. Some locations may have higher rent costs based on the nature of that area.
- EBITDAR communicates a more controllable earnings calculation. Management can more strategically approach earnings calculations when less controllable elements have been removed.
Limitations of EBITDAR
However, there are several cases where EBITDAR is not as advantageous to use:
- EBITDAR manipulates what may be a recurring reorganizational process. Larger companies may restructure their entity very frequently. As this may be an inherent cost of the company, some may argue it is unfair to eliminate this naturally-occurring cost.
- EBITDAR may eliminate controllable costs. An organization must still be held responsible for inefficiency if it continually must undergo restructuring. Because EBITDAR "hides" the restructuring cost, management may not take full ownership of this semi-controllable aspect of operations when only looking at this calculation.
- EBITDAR does not reflect potentially higher selling prices. The argument is to eliminate rent costs as some areas incur higher expenses; however, these areas may also be subject to geographical pricing and more likely to charge higher rates for their products and incur greater income (which is not adjusted for).
- EBITDAR attempts to align reporting to cash activity but may be misleading. A company must still incur cash outlays for interest, taxes, restructurings, and rental costs. By removing these amounts, a company may be misled regarding how much cash it actually goes through in a period.
Strives to exclude non-recurring or one-time expenses
Disregards different capital structures and attempts to compare companies based on their operations only
Adjusts for how different regions may have different costs
Aims to include only the major expenses that management has the ability to control
Removes restructuring costs which may be recurring and part of the normal course of operations for a large company
May remove controllable costs that management should be held accountable for
Does not reduce income for higher cost areas although expenses are adjusted for
May mislead management regarding cash flow needs
EBITDAR vs. Other Financial Calculations
EBITDAR vs. 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.
A company may choose EBITDAR over EBITDA if it has undergone a recent reorganization that will make it more difficult to analyze year-over-year results. In the year of the reorganization, expenses will likely be higher due to conversions, training, and temporary inefficiencies.
A majority of companies are able to stick with EBITDA because (1) they have not recently undergone a reorganization, (2) they wish to still include the cost of that reorganization as part of their earnings analysis since it may have been controllable, and (3) it is a much more widely accepted earnings calculation.
EBITDAR vs. EBIT
The difference between EBITDAR and EBIT is more substantial. EBIT adjusts earnings for interest and taxes, but it still includes the costs allocated to a good over its useful life. EBIT also includes restructuring and rental costs.
The argument for EBIT is that the cost of depreciable assets is still a controllable cost. Although management may not have full discretion on how long as asset is depreciated for or what its depreciable is, the company still decided to incur the cost of acquiring the asset to use as part of operations. For this reason, depreciation is included in EBIT.
The same concept applies to intangible assets that must be amortized. A company can argue it receives a financial benefit (i.e. greater brand awareness, better product recognition) from goodwill; therefore, because it is recognizing the financial benefit, it must also consider the financial cost (amortization).
Potentially the largest difference between EBITDAR and EBIT relates to cashflow. EBITDAR removes many more non-cash expenses and one-time expenses; therefore, EBITDAR may be a more accurate reflection on what a company will need in terms of cash on a recurring basis. On the other hand, EBIT is usually a greater reflection of what a company's accounting profit will be.
EBITDAR vs. Net Income
The greatest difference lies between EBITDAR and net income. Net income is the ultimate bottom line. It includes all company-wide expenses whether they require cash outlay or not. Net income does not distinguish between different types of costs; all expenses are included.
Net income is heavily dictated by accounting rules and non-cash transactions. Though the financial industry heavily relies on analyzing and comparing net income across companies, there are simply too many variables impact this single calculation to make it truly useful for analysis. This idea stemmed the calculations above; instead of relying on a single, broad number, analysists could choose the aspects of a company to look into by forming different metrics such as EBITDAR.
How Do You Calculate EBITDAR?
EBITDAR is calculated by subtracting interest, taxes, depreciation, amortization, and restructuring/rent costs from earnings. Because EBIT and EBITDA are commonly used measurements as well, a company can calculate EBITDAR by manipulating either of those two measurements. For example, a company can simply subtract depreciation, amortization, and restructuring/rent costs from EBIT.
What Is a Good EBITDAR Margin?
It is not uncommon to see an EBITDA ratio exceed 20%. The general rule of thumb is a strong EBITDA measurement is 10%; because EBITDAR may not be substantially different from EBITDA for many companies, a good EBITDAR margin will be at least double-digits.
What Companies Use EBITDAR?
Instead of using EBITDA, EBITDAR is used by companies that recently underwent restructuring. The goal of EBITDAR is to eliminate these one-time restructuring costs to allow management an easier opportunity to analyze financial performance. EBITDAR is also used by casinos, restaurants, or other businesses that typically pay rent. Companies that want to strictly look at financial performance relating to more controllable aspects of operations may choose to internally eliminate rent for better analysis.
What Is the Difference Between EBIT, EBITDA, and EBITDAR?
EBIT, EBITDA, and EBITDAR are all calculations that adjust a company's earnings to eliminate less controllable aspects of the company's operations. The difference between the three is the amount of items that are taken out of earnings for analysis purposes. Calculations with longer acronyms will have more items adjusted out of earnings.
The Bottom Line
EBITDAR is a variation of the very commonly used EBIT or EBITDA calculations. In addition to adjusting income for interest, taxes, depreciation, and amortization, EBITDAR removes (1) restructuring costs and (2) rent payments. This calculation is used by companies that want a better sense of financial performance who recently underwent a one-time restructuring or do not own a majority of their assets.