Earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR) is a financial term used in calculating a company’s financial performance; it is sometimes referred to as operating cash flow. The accepted EBITDAR definition can also include reference to restructuring costs; in this usage, rent is replaced by restructuring in the term. Regardless of which EBITDAR definition is referred to, EBITDAR is a common element of Generally Accepted Accounting Principles (GAAP) that govern how financial reports are constructed and compiled. GAAP ensures the consistency of these financial reports and provides a methodology to allow fair and equitable comparison of the performance of various companies. EBITDAR is used in a number of calculations in order to determine the financial health of an institution.
Generally, EBITDAR is calculated exactly as its name would indicate. Gross earnings are determined without inclusion of interest, taxes, depreciation, amortization, or rent (or in some cases, restructuring fees). EBITDAR is used in a number of other financial equations in order to determine the fiscal health of an institution; because it factors in only expenses directly tied to the day-to-day operation of the business in question, EBITDAR may provide a more accurate measure of the company’s operating health.
Accountants use the debt EBITDAR ratio in order to ascertain the ability of a company to pay its debts. Essentially, this ratio compares the gross income of a business against its outstanding debts to derive a rough estimate of its financial health. The debt EBITDAR calculation is derived by dividing the existing debt by the annual EBITDAR. The resultant figure is used to produce a credit rating for the company that can affect its overall ability to obtain credit and take on debt in the future. A high ratio is considered less desirable and may trigger higher interest rates on loans; a lower ratio corresponds to a higher corporate credit rating and more favorable terms for credit arrangements.
Another ratio of importance to financial analysts, a company’s EBITDAR margin indicates the extent to which revenue is offset by operating expenses. It falls into the general category of profit margin calculations, and is derived by dividing EBITDAR by the total revenue generated by the company. This EBITDAR ratio is used to estimate the company’s ongoing financial health.
Because a company’s EBITDAR figure is a reasonably accurate indicator of the health of its operating cash flow, it has immediate and far-reaching effects on the company’s risk and credit rating. Generally, EBITDAR is most useful as a comparative tool for larger corporations with a great many fixed assets that are subject to depreciation and amortization; by eliminating these factors from consideration, EBITDAR allows a more direct comparison of earnings from company to company.
Variants of EBITDAR
While most references to EBITDAR are intended to exclude rental costs for companies where these constitute a major expense, in some cases the acronym refers to exclusion of restructuring costs. These are regarded as one-time expenses and have usually been accounted for in overall budgeting; because restructuring costs are less common than rental expenses, the term should generally be regarded as referring to rent rather than restructuring unless otherwise specified.