What Is Operating Income Before Depreciation and Amortization (OIBDA)?
Operating income before depreciation and amortization (OIBDA) is a measure of financial performance used by companies to show profitability in their core business activities. OIBDA excludes the effects of capital spending on fixed assets, such as equipment, and the interest expense of carrying debt.
Sometimes OIBDA may not include changes in accounting principles that are not indicative of core operating results, income from discontinued operations, and the earnings and losses of subsidiaries.
- Operating income before depreciation and amortization (OIBDA) shows a company's profitability in its core business activities.
- OIBDA excludes the effects of capital spending on fixed assets, such as equipment.
- OIBDA also excludes the interest expense or cost of debt and tax expenses.
- Analyzing a company's OIBDA shows how well a company is generating revenue while managing its production and operating expenses.
Understanding Operating Income Before Depreciation and Amortization (OIBDA)
Operating income before depreciation and amortization (OIBDA) attempts to show how much income a company is earning for its core business. By analyzing a company's OIBDA, we can see how well a company generates revenue from sales while managing its production and operating expenses.
OIBDA is a non-GAAP financial measure, meaning it's not a regulatory requirement when companies report their financial statements. Regulatory agencies, such as the Securities and Exchange Commission (SEC), mandate that companies report their financial performance in a standardized format to help investors and creditors compare companies more effectively.
However, OIBDA is still a useful metric since it can help investors understand how well a company generates income from its core production and manufacturing business. Below are the components that are often used in calculating OIBDA.
Operating income is the income that a company earns from its core business. Operating income is the result of subtracting operating expenses from gross profit.
Gross profit is a company's revenue minus its cost of goods sold (COGS). Cost of goods sold represents the cost of inventory and supplies needed to produce the goods being sold that generate revenue.
While gross profit shows how much profit a company earns from its production line, operating income is more inclusive. Operating income includes operating expenses for running the company in addition to COGS.
Depreciation and Amortization
When companies purchase an asset such as a piece of machinery, it can be quite expensive. The cost of the asset can be used to reduce a company's taxable income. In other words, net income is reduced by the cost of the asset for tax purposes, thus lowering the taxes paid on the company's profit.
Instead of reporting the total cost of the asset in the year that it was purchased, companies are allowed to spread the cost of that asset each year over the estimated useful life of the asset. This process of expensing the asset over the years is called depreciation and is helpful since it allows companies to earn profit from the asset while expensing only a portion of it each year.
Amortization is the same practice as depreciation except that amortization is used for intangible assets such as a patent, while depreciation is used for tangible assets such as machinery. When calculating OIBDA, depreciation and amortization are added back into operating income since they are typically subtracted from gross profit to arrive at operating income.
Interest and Taxes
Interest and taxes are expense line items found on the income statement. Many companies that purchase fixed assets, such as a building, must borrow the money to finance the purchase.
As a result, the company must pay an interest expense each accounting period, which represents the interest rate applied to the debt by the lender. Taxes are also listed as a separate line item on the income statement showing the tax expense that the company paid based on the applicable tax rate and profit generated.
Interest and taxes are usually listed after operating income, meaning they are not included in operating expenses. As a result, these two expenses would not normally be included in the OIBDA calculation.
However, some companies report interest and tax expenses higher on the income statement and are reflected in operating income and, therefore, must be added back into operating income to arrive at OIBDA.
Formula and Calculation of OIBDA
The formula for calculating operating income before depreciation and amortization (OIBDA) is shown below:
OIBDA=OI + D + A + Tax + Interestwhere:OI=Operating IncomeD=DepreciationA=Amoritization
- Locate operating income on the income statement.
- Locate an expense line item for depreciation and amortization and add that figure to operating income.
- If the deduction for interest and taxes has been included in operating income, they must be added back into operating income. If the expenses are listed after operating income, they should be excluded from the OIBDA calculation.
Please note that some companies may embed depreciation and amortization expense within their COGS or selling, general and administrative expense (SG&A). In other words, there may not be a separate line item for depreciation and amortization. In this case, the company's cash flow statement must be used to find the line item. When calculating cash flow, companies must add non-cash expenses, such as D&A, to net income to arrive at the cash flow for the period.
OIBDA vs. EBITDA
OIBDA and EBITDA or earnings before interest, taxes, depreciation, and amortization are similar but use different income numbers as their starting points.
The OIBDA calculation begins with operating income, while EBITDA begins with net income, which represents the profit for the accounting period. Unlike EBITDA, OIBDA does not incorporate non-operating income or one-time charges. One-time items ultimately add or deduct from a company's profit or earnings but are not included in OIBDA.
This can be seen as an advantage for comparison purposes since non-operating income usually doesn't reoccur year after year. Its separation from operating income ensures that the calculation only reflects the income earned from core operations.
Example of OIBDA
Below is the income statement for Walmart Inc. for the company's fiscal year ending Jan. 31, 2021, via the company's 10-K report issued on March 19, 2021.
OIBDA for 2021
- Operating income was $22.548 billion for 2021.
- Interest and provision for income taxes are listed below operating income, meaning they are not reflected in operating income and can be excluded from the OIBDA calculation.
- However, depreciation and amortization are not listed as a sole line item on the income statement, which means they're embedded in the Costs and Expenses section.
As a result, we must refer to Walmart's cash flow statement for the same period, which is shown below:
- Depreciation and amortization are listed under Cash Flow from Operating Activities totaling $11.152 billion for 2021.
- Walmart's OIBDA for 2021 was $33.70 billion, calculated as $22.548 + $11.152 billion.
OIBDA for 2020 and 2019
Walmart's OIBDA can also be calculated for 2020 and 2019 to compare with 2021's OIBDA to get a better sense of whether 2021 was a good year or not.
- 2020 OIBDA was $31.55 billion; since 2020 operating revenue was $20.568, and D&A was $10.987 ($20.568 +$10.987).
- 2019 OIBDA was $32.635 billion; since 2019 operating revenue was $21.957, and D&A was $10.678 ($21.957 + $10.678).
Walmart's 2021 OIBDA of $33.70 billion was more than $2 billion higher than 2020. However, 2021's OIBDA was approximately $1 billion higher than 2019.
We can see that Walmart is increasing its income from its core business operations since OIBDA in 2021 was much better than 2020 and also beat 2019's OIBDA.
However, 2021's OIBDA was nearly $1 billion higher than 2019, in part, due to a higher depreciation expense for 2021 of $11.152 billion versus $10.678. Perhaps the company purchased new assets in 2021, which led to a higher depreciation expense.
When comparing OIBDA for different companies, it's important to consider whether the two companies are in the same industry and have a similar need for fixed assets. If one company doesn't have many fixed assets while the other does, the depreciation expenses and OIBDA for the two companies might be quite different.