What is EBITDAR?
EBITDAR is a non-GAAP measure of operating profitability prior to capital structure decisions, tax rates, non-cash expenses like D&A, and rent costs.
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How to Calculate EBITDAR (Step-by-Step)
EBITDAR is an abbreviation for Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent.
In practice, EBITDAR is used to measure the financial performance of companies with abnormally high rent costs.
However, for EBITDAR, the effects of rent costs are also removed.
So, why should the impact of rental costs be removed?
The rent costs incurred by companies are removed in EBITDAR to allow for more accurate comparisons between them. The following should also be removed:
More specifically, rent costs are location-dependent and impacted by the circumstances around the particular rental (e.g. competitiveness of real estate market, relationships).
There are numerous methods to calculate EBITDA:
- EBITDA = Net Income + Interest Expense + Tax + Depreciation & Amortization
- EBITDA = EBIT + Depreciation & Amortization
- EBITDA = Revenue – Operating Expenses Excluding Depreciation & Amortization
All of the formulas are conceptually the same, so it does not matter which approach is taken.
EBITDAR Calculator – Excel Model Template
We’ll now move to a modeling exercise, which you can access by filling out the form below.
EBITDAR Calculation Example
- EBIT = $1 million – $650,000 = $350,000
As implied by the name, neither interest nor taxes are accounted for yet in the EBIT metric.
Next, let’s assume that embedded within operating expenses are:
- Depreciation = $20,000
- Amortization = $10,000
- Rent Costs = $80,000
If we add D&A and rent costs back to EBIT, the resulting EBITDAR is $460,000.
- EBITDAR = $350,000 + ($20,000 + $10,000 + $80,000) = $460,000
EBITDAR Industries List
EBITDAR is most prevalent in industries with unusually high rent expenses that differ from company to company, i.e. are dependent on discretionary choices by management (i.e. location, building size).
|Transportation and Aviation||
EBITDAR in Airline Industry
The “rent” in EBITDAR does not necessarily refer to just property or land.
For example, the aviation industry is also known for frequently using EBITDAR.
Under this context, the profit metric compares the operating results of different airlines with the effects of aircraft rental costs removed.
Why? The rental costs vary by each airline because of the different methods used to finance the purchase and maintenance of fleets.
easyJet Consolidated Non-GAAP Income Statement (Source: Annual Report)
EV/EBITDAR Multiple in Hospitality Industry (Hotel Properties)
As another industry example, the most frequently used valuation multiple in the hospitality industry is enterprise value-to-EBITDAR.
There is no standardized method for operating hotel properties, as some are the actual owners while others maintain business models oriented around leasing, management, or franchising.
Therefore, the differences can skew the financial results of these sorts of companies, especially for capital expenditure (Capex) needs.
For instance, the hotel companies that lease their assets typically have artificially lower debt and operating income compared to competitors that own their assets, i.e. the lease financing is “off-balance-sheet.”
Additionally, only the rental expense is recorded on the income statement of the lessee.
Limitations to EBITDAR Profit Metric (Non-GAAP)
EBITDA and EBITDAR are prone to inflating the performance of asset-heavy companies and depicting their balance sheet as healthier than in reality.
Like EBITDA, EBITDAR is less appropriate for companies with different levels of capital intensity.