All current and aspiring business owners must be aware of what EBITDAR is. We will reveal its definition and how to calculate it correctly by adding in the formula all necessary metrics.
- EBITDAR is defined as Earnings Before Interest, Tax, Depreciation, Amortization, Restructuring/Rent costs.
- To make an EBITDAR calculation, we must know the company’s Net Income and the exact cost of Tax, Depreciation, Amortization, and Rent.
- When we add rent cost to EBITDA calculation, it automatically becomes EBITDAR.
- This profit metric can reveal more insights about overall business profitability than it is possible with EBITDA Calculation.
What is EBITDAR?
EBITDAR refers to the company’s earnings before interest, tax, depreciation, amortization, restructuring, and rent costs. This profit metric is a non-GAAP tool, so companies aren’t obliged to report it in their financial statements.
Although EBITDAR is not part of GAAP accounting principles, it can be calculated using the information found on the financial statements of a business.
What Is EBITDAR Formula
EBITDAR is calculated as:
- EBITDAR = EBITDA + Restructuring / Rental Costs
- EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization = Operating Income + Depreciation & Amortization
Which Metrics are Used to Make EBITDAR Calculation?
Net income is the amount of money a business makes after deducting costs, allowances, and taxes. It refers to the amount of income left after the company pays off its dues like employee payroll, rent, bills, and operational costs.
Taxes are mandatory contributions imposed on businesses by a governing entity—taxes fund government activities, including services such as roads and schools or programs such as Social Security.
An interest expense is a cost incurred by a business for borrowed funds. This is considered to be a non-operating expense.
Depreciation is the cost of an asset used for business operations for a certain period. The time considered is often a year, but it can be any period of interest.
Amortization is a technique used in accounting to periodically lower the value of a loan or an asset over a period of time.
Operating income is a company’s revenue after all expenses of operation and depreciation are subtracted from the net revenue of a given time period.
Restructuring and Rent Costs
Companies often have to restructure buildings and properties for their convenience. This is more often considered an investment than an expense because restructuring could increase sales and revenue earned by the company.
Rent is a sunk cost, meaning a guaranteed price a business will concur, regardless of the company’s performance. Rent can vary throughout time and location.
A company that sells and produces high-end leather products to an exclusive market makes a net income of $3 million per quarter.
In the same quarter, the company paid $0.3 in taxes, $2 Million in interest expenses, and $0.2 Million in rent and reconstruction. The company faced $0.1 Million in depreciation.
The EBITDAR of the high-end leather company for this particular quarter is calculated as follows:
- = $3 Million + $0.3 Million + $2 Million + $0.2 Million + $0.1 Million
- = $5.6 Million
In one business year company that transports fresh flowers from farmlands to events like weddings and birthdays has an EBITDA value of $30,000, and the rent the company paid in the year was $12,000.
The company also spent $8,000 to restructure its buildings.
This company’s EBITDAR calculation goes as follows:
- = $30,000 + $12,000 + $8,000
- = $50,000
A company that produces milk powder makes a net income of $50 million annually.
In the same year considered, the milk powder company paid $20 Million in taxes, $5 Million in interest expenses, and $14 Million in restructuring.
This particular year’s rent paid for the factories was $3 Million.
The EBITDAR for the milk powder company in the year is calculated as follows:
- = $50 Million + $20 Million + $5 Million + $14 Million + $3 Million
- = $92 Million
Why It is Important to Calculate the EBITDAR of Business
The EBITDAR is a reasonable way to measure the financial health of a company that has gone through restructuring in the recent past, most commonly a year. This can also be a great way to get insight into businesses with unique rent situations like restaurants.
Knowing the EBITDAR of a business helps reduce variability between companies and creates an equal ground for similar businesses to be considered by potential investors.
Rent costs are is one of the biggest factors when determining what location to choose for a business!
Since rent can vary significantly from location to location, the net income can misrepresent a company’s financial strengths. By adding the rent to EBITDA, EBITDAR eliminates the unfair advantages businesses in low-rent regions have over enterprises that operate in high-rent locations.
Pros and Cons of EBITDAR
Pros of using EBITDAR
- It shows a company’s operating cash flow: This is a crucial benchmark to determine the success of a company’s core business activities and a great metric to show prospective investors the company’s profit potential.
- EBITDAR can be used to compare similar businesses since the costs incurred by similar businesses vary significantly across the location. These variable costs include rent and restructuring costs. Adding these costs to the net income gives a clearer idea of the company’s financial strengths by leveling the playing field for the companies.
- Helps to zero in on a company’s efficiency and performance.
Cons of using EBITDAR
- Taxes, depreciation, amortization, rent, and restructuring fees are still actual expenses the company has to bear. Though using EBITDAR gives a clearer understanding of a company’s performance, it doesn’t show the big picture.
- Since it’s not a GAAP-approved value and it doesn’t need to be reported in the business’s financial statements, people can manipulate the EBITDAR value to make it seem like the business is doing better. Therefore it’s important to consider metrics other than this when making decisions about investing and buying companies.
EBITDAR vs. EBITDA
EBITDA calculation doesn’t incorporate the rent and restructuring costs that the company has. When the rent cost is added, then this profit metric becomes EBITDAR.
EBITDAR is ideal for businesses with unique rent payments and restructuring costs. Some examples of these businesses are restaurants, casinos, hotels, airlines, and shipping companies.
Expenses associated with renting business premises are one of the highest operating costs. Because of that, EBITDAR calculation can give valuable insights into how much profit margin certain businesses can deliver to their owners!