Definition: Earnings before Interest, Taxes, Depreciation, Amortization and Restructuring or Rent costs (EBITDAR) is a valuation metric of a firm’s profitability without considering the tax rate and the capital structure of the company.
What Does EBITDAR Mean?
What is the definition of EBITDAR? Financial analysts use this metric to determine the financial health of a company based on its operating cash flows irrespective of depreciation, amortization or any restructuring or rent cost; therefore, this metric has a direct impact on a firm’s and ability to receive a suitable line of credit based on the cash available before all these costs are covered. This ratio is mostly relevant to firms that undergo restructuring, seeking to evaluate the allocation of resources in the firm’s core operations.
Let’s look at an example.
Example
Alex is a financial analyst. He is analyzing a retail firm, and he wants to calculate the firms’ EBITDAR and compare it to the industry average to determine if the company is financially solvent.
From the company’s income statement, Alex calculates the EBITDAR formula as follows:
EBITDAR = EBIT + Interest + Taxes = $363,530 + $18,176 + $109,059 = $490,765
In this case, the company’s EBIT already includes the depreciation and amortization expenses. Other income statements may state it after the calculation of EBIT.
The company has an EBIT-DAR of almost $500,000 and a net income of about $240,000. Alex uses the EBIT-DAR as an investment analysis metric since it provides information about the company’s operating expenses. The company is undergoing a restructuring phase; therefore, the EBIT-DAR is lower. In 2013 and 2014 the EBIT-DAR was significantly higher, suggesting that the company sustains economic growth, which allows it to be financially healthy.
Furthermore, this metric is helpful because it focuses on the analysis of operating cash flows as a measure of a company’s performance, thereby assisting to the comparison of firms that operate in the same sector or industry.
Summary Definition
Define Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent:EBITDAR means a financial ratio used to value a company based on its profitability.
