What is EBITDARM
EBITDARM is a financial performance measure that is used to refer to a company’s earnings before interest, taxes, depreciation, amortization, rent and management fees. EBITDARM is used in comparison to more common measures such as EBITDA when a company's rent and management fees represent a larger-than-normal percentage of operating costs.
BREAKING DOWN EBITDARM
EBITDARM is not a measure in accordance with generally accepted accounting principles (GAAP). The Securities and Exchange Commission (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. EBITDARM is instead used for internal analysis and presentation to and by investors and creditors. It is also reviewed by credit rating agencies when assessing a company's overall debt servicing ability and credit rating. Because of this use, it is an important factor, as many of the companies who present this measure carry high debt loads. Analysts and investors can gauge the overall level and trend of EBITDARM as well as use it in calculating debt service coverage ratios such as EBITDARM to interest and debt to EBITDARM.
EBITDARM is most likely to be mentioned in the statements of REITs as well as healthcare companies, such as hospitals or nursing facility operators. Industries such as these often lease the spaces they use, so rent fees can become a major operating cost. EBITDARM may be measured against rent fees to see how effective capital allocation decisions are within the company, and to review its ability to service debt.
Measures which involve adjustments to operating income such as EBITDARM, are most informative to investors if they are examined in conjunction with net earnings and more refined non-GAAP measures like EBITDA and EBIT. They are also helpful in comparisons of companies operating within the same industry sector.
Criticisms of EBITDARM
That said, criticisms of adjusted earrings figured such as EBITDA, EBITDAR and EBITDARM are many. They include concerns that the adjustments are distortive because they do not provide an accurate picture of a company’s cash flow, that they are easy to manipulate, and that they ignore the impact of real expenses including fluctuations in working capital. Critics have also expressed concerns that by adding back depreciation expense companies and analysts ignore recurring expenses for capital spending. Supporters of EBITDA and related metrics counter that for certain sectors, adjusting for expenses related to owned and rented assets make earnings more comparable across companies that have differences in the amount of property that is leased versus owned.