What is EBITDAR?
Definition: EBITDAR, Earnings Before Interest Tax Depreciation Amortization and Rent/Restructuring costs, is a metric that enables stakeholders to evaluate the profitability of a business before taking into account operational costs. While the income statement does not show EBITDAR, you can easily derive it.
Instead of including EBITDAR in the income statement, most companies include EBIT, which is narrower and more detailed than EBITDAR. EBIT is another abbreviation for “Earnings, Before, Interest, and Tax.” However, many analysts and investors use another metric called ‘EBITDA’ to value companies. EBITDA is similar to EBIT but one that adds Depreciation and Amortization expenses to the earnings of the company within the accounting year.
Financial analysts, investors, business owners and other relevant stakeholders always want to know how a business is performing against peers and rivals. As such, the stakeholders scour through company financials at the end of every financial year to get the details. Usually, the stakeholders look out for certain items in the financials, which include EBITDAR. This article defines, explains and describes EBITDAR.
Why is EBITDA significant?
From the foregoing, there three major metrics that analysts use to determine the profitability of businesses. EBIT is the narrowest of them all. Oftentimes, this metric is included on the income statement because it only excludes taxes and interest when computing the profitability of the business. As such, the metric is good when valuing a small business that does not have complex operations.
The second metric is EBITDA. This metric includes amortization and depreciation in the expenses that it excludes when computing profitability. If you were comparing the profitability of businesses that operate in the same region and the same industry, EBITDA would be the best metric to use.
However, the task gets trickier when comparing the profitability of two businesses that are located in different regions. For instance, say you would like to compare the profitability of a company in uptown Los Angeles and another one in downtown Detroit. Between these two businesses, the one in uptown LA pays more in terms of rent compared to the one in Detroit.
Therefore, using EBITDA to compare their profitability would not present a clear state of the matter. Here is where EBITDAR comes in now. Because EBITDAR considers rent expenses, it facilitates the most accurate valuation. In addition, this metric is significant in that it helps to value a business in a fair way especially if it undertook some restructuring activities within the accounting perod.
Calculating EBITDAR Formula
You can calculate EBITDAR through two ways. First, you can simply look for the value of EBIT in the income statement and add Depreciation expenses, Amortization expenses, and Rent or Restructuring costs. However, sometimes the EBIT includes depreciation and amortization expenses. If so, the formula to calculate EBITDAR would be:
EBITDAR = EBIT + Interest + Taxes
Nonetheless, not all income statements simplify things like that. Therefore, you will have to find the net income and other expenses in the income statement to compute EBITDAR. The formula for this case would be:
EBITDAR = Net Income + Interest +Taxes + Depreciation + Amortization + Rent/Restructuring costs.
EBITDAR Example
For a better understanding of how to calculate EBITDAR, consider this example. Investor X would like invest in Company Theta for the long term but he is unsure about the sustainability of the asset. As such, he wants to find out if the EBITDAR supports his decision. Below is the income statement for Company Theta. All figures are in US dollars.
| 2019 | 2018 | |
| Revenues | 865,415 | 658,187 |
| Cost of goods | (142,107) | (102,214) |
| Gross profit | 723,308 | 555,973 |
| Operating expenses | ||
| Rent | 3,000 | 3,000 |
| Advertisement | 3,500 | 3,500 |
| Depreciation | 31,000 | 31,000 |
| Amortization | 16,000 | 16,000 |
| Restructuring expenses | 220,000 | – |
| Total operating expenses | (273,500) | (53,500) |
| EBIT | 449,808 | 502,473 |
| Interest expenses | 21,125 | 25,268 |
| Taxes | 129,451 | 133,158 |
| Net Income | 299,232 | 344,047 |
Since Company Theta’s income statement has EBIT already computed, we shall use the initial formula i.e. EBITDAR = EBIT + Interest + Taxes
The EBITDAR for financial year 2019 = 449,808 + 21,125 + 129,451 = 600,384
For FY 2018, the EBITDAR is = 502,473 + 25,268 + 133,158 = 660,899
Clearly, the EBITDAR for 2019 is lower than that for 2018 because of the restructuring expenses in 2019. Therefore, EBITDAR helps an analyst to account for the impact of additional expenses, apart from the usual ones, on the profitability the company.