A Definitive Guide To EBITDAR: With Examples & Formulas

By Indeed Editorial Team

Published 21 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

The measurement of earnings before interest, tax, depreciation, amortisation, restructuring and rent costs (EBITDAR) is an operational efficiency metric. Business analysts use it to calculate a company's operational and financial performance. Knowing about this calculation method can enable you to analyse a company's overall performance from its primary business operations and help make an informed investment decision. In this article, we discuss the meaning of this analysis, explain its purpose and share the formula along with some examples for your understanding.

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What Is EBITDAR?

EBITDAR is an analytical tool that measures a company's revenue or profitability and its operating cash flows without taking into account its tax rate, capital structure or primary non-cash items like amortisation and depreciation. It also skips restructuring and rent costs, allowing analysts to approximate the cash available before paying expenses. Using this metric can help reduce variability from one company's financial expenses to another to focus only on costs related to the operations. It is a useful analytical tool for comparing peer companies within the same industry. Here is a breakdown of each component of the term:

  • Earnings: This is the total profit a company generates from its core operations. Business owners may calculate earnings by subtracting expenses like taxes, depreciation, amortisation, interests and rent costs from the total revenue.

  • Interest: This is the expense a company pays on its loans. Businesses may take different amounts of loans at differing rates of interest depending on credit score, collateral and existing debts.

  • Taxes: The government imposes a corporate tax on the company's profit, which varies per the local taxation laws. This measure removes the effect of taxes on total gain to compare the performance of peer companies in other states, cities or countries.

  • Depreciation: It is an accounting process used to allocate the cost of a tangible asset over its useful life and it represents how much of an asset's value is still viable. This measure adds the expense to net income as the depreciation depends on the past investment of the company and not on its operating performance.

  • Amortisation: This is the process of gradually writing off the initial cost of an asset through principal and interest payments. Analysts can use an amortisation schedule to reduce the current balance on loans.

  • Restructuring costs: Investors may not consider restructuring costs of land or a building, as it is an expense that does not occur frequently. Though it may help the company generate additional profit, investors may include this cost in net income to understand how well the central business model is performing.

  • Rental costs: These expenses often vary based on location. The measurement metric removes this sunk cost to understand the company's operating performance and potential.

Related: What Are Profitability Ratios? (With Types And Examples)

Applications

This method can facilitate an accurate analysis of the company's financial performance and health. Many companies prefer to calculate this metric for internal accounting requirements, like periodic financial reporting within the company. A firm that recently completed restructuring its physical space may use this method to measure its financial gains after deducting the restructuring costs. Here are the applications of this financial analysis method:

  • Business analysts may use the method to measure the pure cash flow of a company.

  • Investors may use this method to determine the exact value of the company.

  • Senior-level management may use this method to determine the profitability of companies after restructuring to assess their ability to generate profit.

  • It is also helpful to compare the performance of similar companies.

  • This method is beneficial for comparing two distinct companies within the same industry and calculating the financial performance of the two.

Related: Gross Income: What It Is And How To Calculate It Per Month

How To Calculate It

Investors require the company's net earnings, taxes, depreciation, amortisation, rent or restructuring costs and interests paid on the debts to calculate the final value. Once you identify these expenses, you can apply the formula and calculate the company's actual earnings. If you have a company's EBITDA amount, you can measure the final value by adding restructuring and rent costs.

Business analysts may use this formula to determine the performance and financial health of companies that have undergone restructuring, such as service industries. As these companies use different ways of financing and asset acquisition, this can be a useful method for measuring their overall return on investment. There are two ways to calculate the amount for a company. One, you can look for the value of EBIT in the company's income statement and add depreciation, amortisation and rent or restructuring expenses. Alternatively, if the EBIT includes depreciation and amortisation expenses, you can use the following formula to calculate EBITDAR:

Net income + Interest + Taxes + Depreciation + Amortisation + Restructuring or Rent costs

Or,

EBITDA (Earning before interest, taxes, depreciation and amortisation) + Restructuring/Rental Costs

Related: How To Calculate Variable Cost In 3 Steps (With Examples)

Example

One major benefit of using this method is that it can help investment analysts evaluate a company's operating performance without considering factors unrelated to core operations. Here is an example of how to calculate this figure:

Suppose a company is earning a revenue of ₹1,59,49,315 and incurring operating expenses of ₹3,989,125.30. Then the earnings before interest come to ₹1,19,68,985. if the operating costs include depreciation and rent costs, you can add back the amount to EBIT. This gives the following calculation:

  • Depreciation = ₹1,19,670.38

  • Rent = ₹7,97,802.50

  • Restructuring cost = ₹11,96,906.25

  • Final value = (₹3,989,125.30 + ₹1,19,670.38 + ₹7,97,802.50 + ₹11,96,906.25) = ₹6,103,504.43

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What Is Its Purpose?

It is a non-GAAP (generally accepted accounting principles) tool for all the major service industries, like the hospitality, retail, transportation and aviation sectors. The rent or restructuring cost may not apply to just land or property. For example, the airline or aviation industry frequently uses this value to compare the operating results of different airlines by removing the effects of aircraft rental costs.

The primary purpose of using this metric is to settle the differences that may occur while comparing peer companies within the same industry. The intention is to focus on the company's core operating activities instead of considering any factors that may create a bias in the analysis. With this metric, business analysts may exclude variable costs and create uniform comparison criteria of two peer companies within the same industry. It is also a helpful metric for lenders while exploring business loans, as it helps estimate the company's available cash flows for interest payments and principal.

Other Methods To Calculate A Company's Earnings

Here are some alternative methods to calculate a company's financial health and earnings:

Gross income

Gross income is the total profit a company makes from selling its services and products. Usually, financial analysts calculate gross income annually, but some companies may ask an analyst to calculate it quarterly. Analysts consider the company's earnings from selling goods and deduct the expenses incurred during production to calculate gross profit. The analysis aims to determine if the company maximises its profit from selling its products. Here is the formula for measuring a company's gross income:

Company's gross income = Revenue derived from sales − Cost of products and services sold

EBIT

Earnings before interest and taxes (EBIT) are another indicator of a company's financial performance. Financial analysts may use this method to analyse the profit of the company's core operations without considering capital structure and tax expenses. This method subtracts a company's manufacturing costs, including total operating expenses, employee wages and raw materials. Here is a formula for EBIT:

EBIT = Revenue - COGS (Costs of goods sold) - Operating expenses

Related: Understanding Cost Of Goods Sold (With Formula And Methods)

EBITDA

EBITDA does not include restructuring and rental costs, but it can help compare the financial level of the two companies. The method reports earnings before interests, taxes, depreciation and amortisation. Here is the formula to analyse a company's performance with EBITDA:

EBITDA = Operating income + Depreciation + Amortisation

Or,

EBITDA = Net income + Interest + Taxes + Depreciation + Amortisation

Net income

Net earnings or net income is the amount of profit left after deducting the total costs. Analysts often use a company's net earnings to measure the ratio of the company's profit to expenses. Here, the total revenue refers to the profit a company has earned from selling products and services. Total expenses refer to the company's spending, such as operating expenses, income tax, interest costs on loans, depreciation and other general costs. Here is the formula for calculating net income:

Net income = Total revenue - Total expenses

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