What Is EBITDARM?
EBITDARM (earnings before interest, taxes, depreciation, amortization, rent, and management fees) is a selective earnings metric employed to measure the financial performance of certain companies. EBITDARM is compared to more common measures, such as EBITDA, when a company's rent and management fees represent a larger-than-normal percentage of operating costs.
- EBITDARM stands for earnings before interest, taxes, depreciation, amortization, rent, and management fees and is a non-GAAP earnings metric used to measure financial performance.
- The measure is helpful when analyzing companies whose rent and management fees make up a substantial amount of operating costs.
- EBITDARM is often used to make earnings more comparable across companies with vastly different operating costs and review its ability to service debt.
- Companies that report their earnings based on GAAP are required to disclose how they calculate EBITDARM in the notes that accompany their financial statements.
Investors have several financial metrics at their disposal to analyze the profitability of a company. Many focus on simple earnings or net income. Other times, it can be helpful to include or exclude particular line items to gauge performance.
EBITDARM is an extension of EBITDA, short for earnings before interest, taxes, depreciation, and amortization, a formula designed to evaluate a company's performance and its ability to make money without factoring in financing and accounting decisions or tax environments—expenses not considered a part of operations.
Where EBITDARM differs is that it also strips out rental and management fees when calculating profitability. This is useful when analyzing companies where such fees make up a substantial amount of operating costs.
Real estate investment trusts (REITs), companies that own or fund income-generating properties, and healthcare companies, such as hospitals or nursing facility operators, tick this box as these industries often lease the spaces they use, meaning that rent fees can become a major operating cost. EBITDARM allows a better view of these companies' operational performance by stripping out those sometimes unavoidable, fixed expenses that eat into profit.
Adjusting for expenses related to owned and rented assets make earnings more comparable across companies that have differences in the amount of property they lease or own.
EBITDARM is generally be calculated as follows:
- EBITDARM = net income + interest + taxes + depreciation + amortization + rent and restructuring + management fees
Not all companies will report EBITDARM. This metric and other similar types of adjusted earnings figures do not run in accordance with generally accepted accounting principles (GAAP) and are designed for in-house use only.
Though not compulsory, this metric does pop up in financial statements, prompting the Securities and Exchange Commission (SEC) to lay out some rules on how it must be reported. The SEC requires companies that report their earnings based on GAAP, but use EBITDARM and other non-GAAP financial measures, to disclose how they are calculated in the notes that accompany their financial statements.
Benefits of EBITDARM
Measures that involve adjustments to operating income are most informative to investors if they are examined in conjunction with net earnings and more refined non-GAAP measures, such as EBITDA and EBIT (earnings before interest and taxes.) They are also helpful in comparisons of companies operating within the same industry sector, including, for example, one that owns its property and one that leases it.
EBITDARM may be measured against rent fees to see how effective capital allocation decisions are within the company. It is also commonly used to review a company’s ability to service debt, especially by credit rating agencies (CRAs).
Many of the companies that present this measure carry high debt loads. Analysts and investors can gauge the overall level and trend of EBITDARM as well as use it to calculate debt service coverage ratios such as EBITDARM to interest and debt to EBITDARM.
Criticism of EBITDARM
Criticisms of adjusted earnings figures such as EBITDA, EBITDAR, and EBITDARM are plentiful. They include concerns that the adjustments are distortive because they do not provide an accurate picture of a company’s cash flow, they are easy to manipulate, and they ignore the impact of real expenses, including fluctuations in working capital.