# EBITDAR

Guide to Understanding the EBITDAR Concept

• What is the definition of EBITDAR?
• Which formula calculates EBITDAR?
• For which industries is using EBITDAR common?
• Why does EBITDAR remove the impact of rental costs?

## EBITDAR Definition

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.

EBITDAR is independent of the capital structure (i.e. unaffected by financing decisions), the tax structure, and non-cash items (e.g. depreciation, amortization), just like EBITDA.

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).

## EBITDAR Formula

The first step to calculating EBITDAR is to calculate EBITDA, which is perhaps the most frequently used measure of operating profitability.

There are numerous methods to calculate EBITDA:

All of the formulas are conceptually the same, so it does not matter which approach is taken.

The difference between the EBITDA and EBITDAR metrics is that the latter also excludes rent costs, plus any non-recurring items such as restructuring charges.

###### EBITDAR Formula
• EBITDAR = EBIT + Rent Costs + Restructuring Charges

## EBITDAR Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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## EBITDAR Calculation Example

Suppose a company generated \$1 million in revenue the past fiscal year with \$650,000 in total operating expenses, i.e. the sum of cost of goods sold (COGS) and operating expenses (OpEx).

Upon deducting the operating expenses from revenue, we arrive at \$350,000 for EBIT, also known as operating income.

• 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)
• EBITDAR = \$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).

Industry Examples
Hospitality
• Hotels
• Casinos
• Resorts
• Gaming
Retail
• Supermarkets
• Grocery Chains
Transportation and Aviation
• Airlines
• Trucking

## 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, EBITDAR 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.

We can see the calculation of EBITDAR, as well as the excluded expenses from the non-GAAP income statement, from easyJet’s annual report below.

easyJet Consolidated Non-GAAP Income Statement (Source: Annual Report)

## EBITDAR in Hospitality Industry — Hotel Properties

As another industry example, the most frequently used valuation multiple in the hospitality industry is enterprise value-to-EBITDAR.

###### EV/EBITDAR Formula
• EV/EBITDAR = Enterprise Value ÷ EBITDAR

There is no standardized method to 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.”

Instead of appearing on the balance sheet of the lessee (i.e. holder of the lease), it remains on the balance sheet of the lessor (i.e. the owner of the asset being leased).

Additionally, only the rental expense is recorded on the income statement of the lessee.

Often off-balance-sheet financing can also artificially keep leverage ratios low, which is why EBITDAR can be used for leverage ratios and coverage ratios too.

## Limitations to EBITDAR

Unlike metrics such as operating income (EBIT) and net income, EBITDAR is non-GAAP and impacted by discretionary management decisions on which items to add back or remove.

As a non-GAAP metric, EBITDAR can be (and typically is) adjusted for non-recurring items, most notably restructuring expenses, similar to “adjusted EBITDA.”

The drawbacks to EBITDAR are virtually identical to the criticism surrounding EBITDA, namely the failure to account for capital expenditures (CapEx) and the change in net working capital (NWC).

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.

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