EBITDAR: Definition and How To Calculate (With Example)
By Indeed Editorial Team
Published September 29, 2021
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.
One way that businesses measure their performances is by calculating their earnings before interest, taxes, depreciation, amortization and restructuring and rent (EBITDAR). Businesses may calculate their EBITDAR to know their raw earnings before factoring in their non-cash, non-operating and non-recurring expenses. Learning how to calculate EBITDAR can help you measure your business' earnings to better understand its valuation. In this article, we define what EBITDAR is, explain how it works and how to calculate it and provide an example to help you use it in your business.
What is EBITDAR?
EBITDAR is a method of calculating your business' earnings before subtracting expenses related to interest, taxes, depreciation, amortization and restructuring and rent costs. It can help you gain an understanding of your business' financial success, and organizations typically use it within a year of restructuring their business. This measure analyzes a business' core operating performance and is useful for making comparisons between similar companies operating within the same industry.
For example, if an investor wanted to choose between two bookstores and one paid a significantly higher amount of rent due to its location than the other, the investor may wish to see the EBITDAR for both businesses. Considering this measure calculates the cost of rent as a factor in each business' core profitability, allowing the investor to make a more informed decision based on the business' operational performance. Additionally, if a business recently restructured, EBITDAR accounts for these expenses, which are one-time expenses rather than a recurring cost of operation.
How does EBITDAR work?
EBITDAR works by accounting for location-specific expenses, such as taxes and rent, to give businesses, investors, creditors and debtors a pure calculation of a business' earnings regardless of what the organization pays in taxes, rent and non-recurring costs like restructuring. Most income statements don't include EBITDAR, so businesses calculate this metric using the information available on their income statement. Since EBITDAR is not a required financial reporting metric for public companies, many businesses calculate it for internal purposes. For example, a business that recently restructured its operations may use EBITDAR to analyze its operational expenses independent of restructuring expenses.
Some other applications and considerations for using EBITDAR include:
EBITDAR can help with determining the valuation of a business that pays a significant amount of rent, such as a shipping company, hospital, casino, restaurant or airline company.
Analysts may use EBITDAR to calculate pure cash flows since the formula calculates operating income before making deductions for interest, taxes, depreciation, amortization and rent.
For businesses that recently conducted operations restructuring, EBITDAR demonstrates the organization's ability to generate profit despite its restructuring costs.
EBITDAR isn't a measure that the Generally Accepted Accounting Principles (GAAP) consider or classify because it's used primarily to compare two businesses in the same industry that have different asset structures.
EBITDAR factors rent because rent is a sunk cost, meaning that financial statements already account for rent regardless of the business' financial performance.
Analysts consider the total rent costs a company pays and includes them in their calculation to determine the business' operating potential because rent can be a significant cost that results in a business appearing to have low operating profits even if their core operations successfully generate substantial profit.
Analysts consider restructuring costs similar to rent costs. Since businesses can invest a significant amount of money over many years to develop and restructure their company, these non-recurring expenses can make a business appear less profitable on its income statement than it actually is.
How to calculate EBITDAR
Here are the steps for calculating EBITDAR:
1. Know the formula
The first step to calculating EBITDAR is to know the formula. The formula for calculating EBITDAR is:
EBITDAR = net income + interest + taxes + depreciation + amortization + rent and restructuring
This formula factors in your business' net earnings and its non-cash, non-operational and non-recurring expenses. These expenses reflect costs related to location and one-time restructuring investments. To use this formula, find the sum of the business' net income, interest, taxes, depreciation, amortization and rent and restructuring to arrive at its EBITDAR.
2. Review your income statement
After learning the formula to calculate EBITDAR, the next step is to review your business' income statement. An income statement is a document in which a business' accounting team records its revenues and expenses within a specific timeframe. Investors rely on the income statements of public companies to determine whether they wish to invest in the company. It helps them understand a business' current profitability and potential for future growth. Most income statements include entries for each of the items used to calculate EBITDAR. Once you've accessed your income statement, identify each item needed to calculate your business' EBITDAR.
3. Calculate the sum
Once you've learned the formula and used your income sheet to find the entry for each item needed to calculate EBITDAR, use these entries to perform the calculation. For example, an income statement may list the following entries:
Net income: The business' net income entry is $800 million.
Interest: They list their interest as $300 million.
Taxes: The business records its taxes as $200 million.
Depreciation: The business' deprecation is $100 million.
Amortization: The income statement documents the business' amortization as $75 million.
Rent: Finally, the business' rent is $150 million.
Based on this data, use the formula to insert each entry and then perform the calculation. The completed formula with this data looks like:
$1,625 million = $800 million + $300 million + $200 million + $100 million + $76 million + $150 million
Example of EBITDAR
Here is an example of how to calculate EBITDAR:
Logan's Moving Company records its revenue and expenses on its income statement using this table:
Revenue$20 millionNet income$15 millionInterest$1 millionTax$2 millionDepreciation$1 millionAmortization$1 millionRestructuring and rent$1 millionEBITDAR$21 millionThe company calculates its EBITDAR by adding net income, interest, tax, depreciation, amortization and restructuring and rent. Although GAAP doesn't require Logan's Moving Company to include EBITDAR as an entry on their income statements, they choose to include it for investors who want to compare their company to a similar business in the same industry. This makes it easy for investors to compare the profitability of similar companies in different locations that have different asset structures.
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