There are many financial metrics available to analyze the profitability of a company. Each metric typically includes or excludes particular line items to arrive at its result. EBITDA, EBITDAR, and EBITDARM are profitability indicators to help evaluate the financial performance and resource allocation for operating units within a company.
Understanding EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortization) measures a company’s profitability. EBITDA removes the costs of debt financing, tax expense, as well as depreciation, and amortization expenses from profits. As a result, EBITDA can be beneficial since it provides a stripped-down view of a company’s profitability from its core operations.
EBITDA is calculated by taking operating income and adding back depreciation and amortization. EBITDA became popular in the 1980’s to show the potential profitability of leveraged buyouts. However, at times, it has been used by companies that wish to disclose more favorable numbers to the public.
Understanding EBITDAR
EBITDAR (earnings before interest, taxes, depreciation, amortization and rent/restructuring costs) is a variation of EBITDA whereby rent and restructuring costs are excluded. EBITDAR is useful for companies undertaking restructuring efforts since restructuring charges are typically one-time or non-recurring expenses. Removing the restructuring costs shows a clearer picture of the operating performance of the company and perhaps might help with obtaining financing from a creditor.
Understanding EBITDARM
EBITDARM (earnings before interest, taxes, depreciation, amortization, rent/restructuring costs and management fees) strips out rental costs as well as management fees.
EBITDARM is helpful when analyzing companies where the rent and management fees make up a substantial amount of operating costs. Hospitals, for example, typically lease the building space that they use, meaning rental fees can be a major operating cost. Also, companies that require a large amount of storage space will also have high rental expenses, and EBITDARM can help to strip out those costs allowing a better view of the operational performance of those companies.
For more on this topic, please read “A Clear Look at EBITDA” and “How Are Operating Income and EBITDA Different?”