What is EBITDAR?
EBITDAR stands for Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent costs. It is a non‑GAAP operating metric used to isolate a company’s core operating performance by removing financing, tax, non‑cash accounting charges, and either restructuring or rent-related costs. Analysts commonly use EBITDAR to compare companies where rent or recent restructuring skews operating expense comparisons (for example, restaurants, hotels, casinos, or retailers).
Key takeaways
– EBITDAR = Earnings (net income) + Interest + Taxes + Depreciation + Amortization + Restructuring or Rent costs.
– It is an internal/comparability metric (not required by GAAP/IFRS).
– Useful in industries with material and variable rent or when a company recently incurred restructuring charges.
– Limitations: ignores capital expenditures, working capital, and true cash flows; can be affected by accounting changes (e.g., lease accounting standards).
Formula and basic calculation
You can compute EBITDAR starting from several income measures; the common routes are:
– From EBITDA: EBITDAR = EBITDA + Restructuring or Rent costs
– From EBIT: EBITDAR = EBIT + Depreciation + Amortization + Restructuring or Rent costs
– From Net Income: EBITDAR = Net Income + Interest + Taxes + Depreciation + Amortization + Restructuring or Rent costs
Where:
– Interest = interest expense (cost of debt financing)
– Taxes = income tax expense
– Depreciation = non‑cash allocation of tangible asset cost
– Amortization = non‑cash allocation of intangible asset cost
– Restructuring or Rent costs = one‑time restructuring charges or recurring rental/lease expense that you want excluded for comparability
Earnings and the add‑backs (what each item represents)
– Earnings (Net Income): the bottom‑line profit after all expenses. EBITDAR backs this figure up to isolate operations.
– Interest Expense: cost of borrowing. Removed to compare firms with different capital structures.
– Tax Expense: income tax costs. Removed because tax rates and structures differ by jurisdiction and company.
– Depreciation: allocation of tangible asset cost over time; a non‑cash expense.
– Amortization: allocation of intangible asset cost over time; non‑cash.
– Restructuring Costs: one‑time costs related to reorganizations (severance, asset write‑downs) that may not reflect ongoing performance.
– Rental (or lease) Costs: recurring rent payments that can vary widely by location or franchise model and can distort comparisons among peers.
What EBITDAR tells you
– Core operational profitability: by excluding financing, tax, non‑cash accounting items, and rent/restructuring, EBITDAR focuses on operating earnings potential (before the excluded items).
– Comparability across locations and capital structures: helps compare firms with materially different rent environments or those that have recently restructured.
– Use for valuation/credit metrics: investors and lenders sometimes use EV/EBITDAR or interest coverage based on EBITDAR in rent‑heavy sectors.
Practical step‑by‑step: how to calculate EBITDAR (from an income statement)
1. Obtain the income statement and supporting notes for the period.
2. Identify net income (or start from EBIT or EBITDA if available).
3. Add back:
– Interest expense (from income statement)
– Income tax expense (from income statement)
– Depreciation expense (often in operating expenses or notes)
– Amortization expense (often disclosed separately or in notes)
– Restructuring charges and/or rental expense (look for “restructuring”, “reorganization”, “lease expense”, “rent” line items or footnotes)
4. Sum to get EBITDAR.
5. For margin: EBITDAR margin = EBITDAR / Revenue.
6. For valuation: compute EV/EBITDAR = Enterprise Value / EBITDAR (commonly used for hotels, restaurants, airlines).
Worked example (illustrative)
Assume a company reports:
– Revenue: $1,000,000
– Operating expenses (including depreciation $15,000, amortization $10,000, rent $50,000): $400,000
– Interest expense: $20,000
– Income tax expense: $10,000
Step calculations:
– Net income = Revenue − Operating expenses − Interest − Taxes
= 1,000,000 − 400,000 − 20,000 − 10,000 = 570,000
– EBIT = Net income + Interest + Taxes = 570,000 + 20,000 + 10,000 = 600,000
– EBITDA = EBIT + Depreciation + Amortization = 600,000 + 15,000 + 10,000 = 625,000
– EBITDAR = EBITDA + Rent = 625,000 + 50,000 = 675,000
Tip
– Always check the notes for one‑time restructuring items and whether rent is recognized as rent expense or, under updated lease accounting, partly as depreciation/interest. Make consistent adjustments across peers and periods.
Advantages of EBITDAR
– Improves comparability where rent levels or restructuring charges differ materially (same business operating in high‑rent vs. low‑rent locations).
– Removes non‑operating and non‑cash items to focus on operating profitability.
– Useful input for certain sector valuations (EV/EBITDAR for hotels, restaurants, casinos, some retail).
Limitations of EBITDAR
– Non‑GAAP and nonstandardized: companies may calculate and disclose differently or not at all.
– Ignores capital expenditures, working capital needs and cash flow realities—none of which are captured by add‑backs.
– Can be misleading after lease accounting changes: accounting standards (ASC 842, IFRS 16) changed how leases appear in the income statement and balance sheet, affecting the usefulness of simple rent add‑backs.
– Can mask true economic profitability and debt service ability since interest and taxes are excluded.
– Potential for management manipulation through what is deemed “non‑recurring”.
EBITDAR vs. other metrics
– EBITDAR vs. EBITDA: EBITDAR further adds back restructuring or rent to EBITDA. Use EBITDAR when rent or restructuring materially distorts operating expense comparisons.
– EBITDAR vs. EBIT: EBIT excludes interest and taxes but still deducts depreciation and amortization. EBITDAR excludes those non‑cash items plus rent/restructuring.
– EBITDAR vs. Net income: Net income is the after‑tax, after‑interest profit. EBITDAR backs net income up to a pre‑interest, pre‑tax, pre‑non‑cash, and pre‑rent/restructuring measure.
What is a “good” EBITDAR margin?
– There is no universal “good” margin. Acceptable or strong EBITDAR margins depend on the industry, business model, geography, and business lifecycle.
– Practical approach: compare EBITDAR margins to historical company margins, direct competitors, and industry averages. In rent‑heavy sectors, focus on EBITDAR and EBITDAR margin trends rather than absolute figures.
Which companies commonly use EBITDAR?
– Restaurants and franchisees (rent varies by location and lease model).
– Hotels and casinos (rent, concessions, and franchise payments can dominate).
– Retailers with varied store lease commitments.
– Companies that recently underwent restructuring (to exclude one‑off charges).
Accounting changes and comparability considerations
– Lease accounting standards (ASC 842 in U.S. GAAP and IFRS 16 internationally) require many leases to be recognized on the balance sheet and change the income‑statement presentation (lessees typically recognize depreciation and interest instead of a straight rent expense). This can reduce consistency when simply adding back “rent” to EBITDA, so careful adjustments or restatements may be necessary to maintain comparability across periods or peers.
– Always document assumptions: whether you used rent expense, operating lease expense, or constructed a “lease equivalent” to be consistent across firms.
Practical steps for analysts using EBITDAR
1. Define precisely what you’re adding back (rent vs. restructuring) and why.
2. Be consistent across companies and time periods.
3. Reconcile to cash flow: check operating cash flow and capex to ensure operating earnings aren’t masking cash constraints.
4. Adjust for lease accounting: if a peer capitalizes leases, normalize treatment (either add back a consistent lease expense or adjust for depreciation/interest recognized).
5. Use EBITDAR alongside other metrics (EBITDA, free cash flow, net income, leverage ratios) rather than as the sole basis for decisions.
6. If valuing a company, consider EV/EBITDAR in industries that use it, but cross‑check with EV/EBITDA and discounted cash flow approaches.
EBIT, EBITDA, and EBITDAR — quick comparison
– Net income: bottom line after all expenses (interest, taxes, depreciation, amortization, one‑time items).
– EBIT (Operating Income): excludes interest and taxes; includes depreciation and amortization.
– EBITDA: excludes interest, taxes, depreciation, and amortization.
– EBITDAR: excludes interest, taxes, depreciation, amortization, and either restructuring charges or rent.
The bottom line
EBITDAR is a focused, non‑GAAP metric designed to highlight a company’s core operating performance while removing rent or restructuring costs that can obscure comparability. It’s valuable in rent‑intensive industries and when analyzing companies that recently restructured, but it must be used carefully—document assumptions, adjust for lease accounting changes, and always pair EBITDAR with cash‑flow and balance‑sheet analysis to get a complete picture.
Source
Investopedia — “EBITDAR” (https://www.investopedia.com/terms/e/ebitdar.asp) (source used as a reference for concepts and common practice).