EBITDAR is a slightly obscure profit metric that provides useful insights on the performance of a business in specific situations. In simple terms, these circumstances are when the business has either suffered an exceptional restructure process or if it has unique rent costs. For clarity, this is what the letter R refers to (i.e. either restructure or rent costs) but not both.
How do you calculate EBITDAR?
Brace yourself, friend. The EBITDAR metric (pronounced EE-BIT-DAR) refers to business earnings before interest, tax, depreciation, amortisation, and either restructure or rent costs. The easiest way to explain this is to start with net profit. That figure is the revenue of the business over a given period once all expenses are removed, including interest or tax due.
However, there are several flavours of profit, depending on which expenses you include in this calculation. In many situations, it’s helpful to add back specific costs onto the net profit sum that would otherwise distract attention from the underlying performance of a company.
The most common examples here are tax and interest, which then creates the EBIT metric. The next step is to add depreciation or amortisation, which are the amounts shown on the income statement of a business for the decline in the value of its long-term assets, such as machinery or licences, to create the EBITDA profit metric. The EBITDAR formula goes one step further by adding back the costs of either a restructure or rent.
EBITDAR = Net profit + [Interest + Tax + Depreciation + Amortisation] + Restructure or Rent
EBITDAR = EBITDA + Restructure or Rent
Why do airlines use EBITDAR?
The EBITDAR metric is popular with businesses that have unusual rent costs, such as hotels, casinos, and even supermarkets. But rent does not always refer to a building or land. EBITDAR is common in the aviation industry to compare the operating incomes of airlines without the rental costs of the aircraft. This practice exists because rental costs vary greatly among airlines, due to the many different ways in which they choose to finance their fleets.
Is it good to have a high EBITDAR?
It’s nearly always good news for the profits of a business to be high, no matter how this is measured – and EBITDAR is no different. One obvious exception could be if the business was worried about paying the resulting tax bill; another scenario is if you were a stakeholder in a competing business. The bigger question is what does it say about a business when its EBITDAR is higher than other profit metrics, such as the operating profit or the EBITDA?
The answer is mostly to do with which specific expenses you include within the calculation. There is a strong case to exclude the hefty cost of a one-off charge to restructure a business with historically impressive operational performance, or to remove the arcane rents that a casino pays to reside in a hotel. Even so, to rely on a niche metric such as EBITDAR that strips-out so much ‘bad stuff’ could risk providing a profit figure that’s irrelevant to investors.
This is why so many businesses provide notes within their accounts to explain these points.Sign up in minutes