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Guide to EBITDAR: What You Should Know

What Is EBITDAR & How Does EBITDAR Work?
Lauren Ward

Lauren Ward

Updated June 6, 2022
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EBITDAR, which stands for earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs, is an operational efficiency metric. It’s often used by investors, lenders, and business owners to understand how well a company is performing from its primary business operations. It does this by adding back non-operational, non-recurring, and non-cash expenses to net income.Here’s what you need to know about EBITDAR, including how to calculate it, how it’s used, and what it can tell you about your business.

What Is EBITDAR?

EBITDAR is a variation of EBITDA (earnings before interest, taxes, depreciation, and amortization), an accounting method that removes the effects of non-operational costs from net income. The only difference? EBITDAR also excludes restructuring and rental costs. (EBITDAR is also similar to adjusted EBITDA, which includes the removal of various one-time, irregular, and non-recurring items from EBITDA.)By removing rental costs, investors can analyze companies that may have similar operations but that choose to access assets differently — some companies rent while others choose to own. Excluding rentals allows comparison of profits apples-to-apples.EBITDAR is also an important measure if you are exploring business loans because it is often used by lenders to estimate the cash flows that a company has available for principal and interest payments.Here’s a breakdown of each part of EBITDAR and why each variable is important.Earnings: Earnings are the profit a business makes off of its core operations. With EBITDAR, earnings are calculated by subtracting expenses from total revenue. However, unlike net earnings, EBITDAR doesn’t subtract all business expenses. It factors in the cost of goods sold, general and administrative expenses, and other operating expenses, but doesn’t subtract costs that are not directly related to the company’s operations, namely interest paid on debt, amortization and depreciation expenses, income taxes, and the cost of restructuring or renting.Interest: The interest a company pays on its loans is added back to net income with EBITDAR. The reasoning behind this is that, while interest is an expense, it doesn’t reflect how well the company is utilizing its debt. Businesses take on different amounts of debt for different reasons and receive different interest rates based on a variety of factors (for example, credit score, existing debt, and collateral). Taxes: Each locality has different tax laws. Depending on where a business is located, it may have a dramatically different tax burden than another company with the same amount in sales. To better compare companies, EBITDAR removes the effect of taxes on net income. This makes it easier to compare the performance of two or more companies operating in different states, cities, or counties. Depreciation: Depreciation is the process of writing off the cost of a tangible asset over the course of its useful life. With EBITDAR, depreciation is added back to net income because depreciation depends on past investments the business has made and not on the company’s operating performance.Amortization: Amortization is similar to depreciation, but is used to spread out the cost of intangible assets, such as patents, copyrights, trademarks, non-compete agreements, and software. These assets also have a limited useful life due to expiration. Amortization is added back to net income in EBITDAR because this expense isn’t directly related to a business’s core operations.Restructuring Costs: The restructuring of land or a building is an expense that doesn’t occur very often for most companies. And, many analysts view it as more of an investment that could potentially help the company generate additional revenue and profits. As a result, any costs associated with restructuring are added back to net income with EBITDAR to give analysts a better understanding of how well the central business model is performing.   Rental Costs: Because rent can vary significantly from one location to the next, and is not within a business’s control, rent costs are added back to net income in EBITDAR. This allows for a better understanding of a company’s operating performance and potential. In addition, rent is a sunk cost, which means the expense is guaranteed to occur regardless of how a company performs. 

EBITDAR Formula

The standard formula for EBITDAR is:EBITDAR = Net income + Interest + Taxes + Depreciation + Amortization + Restructuring or Rent CostsAn alternative formula:EBITDAR = EBITDA + Restructuring/Rental Costswhere:EBITDA = Earnings before interest, taxes, depreciation, and amortization

How Does EBITDAR Work?

The premise of EBITDAR is that certain expenses can distract analysts from understanding how well a company is bringing in business. It only includes core operating expenses, and the following expenses are added back to net income:
  • Non-cash expenses
  • Non-recurring expenses
  • Non-operational expenses
Recommended: Net Operating Income vs EBITDA: Similarities, Differences, and How to Calculate 

Calculating EBITDAR

EBITDAR is a non-GAAP (generally accepted accounting principles) tool and does not appear on a company's income statement. However, it can be calculated using information from the income statement. To calculate EBITDAR, you need to know a company’s net income (the “bottom line” of an income statement), as well as exact numbers for interest paid on debt, taxes, depreciation and amortization expenses, as well as rent/restructuring costs. You then add these numbers back to net income to arrive at a company’s EBITDAR.If you have a busines’s EBITDA number, you can easily calculate EBITDAR by adding any rent or restructuring costs to the EBITDA number.

What EBITDAR Tells You

EBITDAR, rather than EBITDA, is primarily used to analyze the financial health and performance of companies that have gone through restructuring within the past year or have unique rent costs, such as restaurants, casinos, shipping companies, and airlines.EBITDAR (like EBITDA) is also useful for measuring a company's operating cash flow and for comparing the profitability of companies with different capital structures and in different tax brackets.However, companies do have to pay interest, taxes, and rent, and must also account for depreciation and amortization. As a result, EBITDAR is not a complete picture or offers a true measure of how profitable a business is. In some cases, it can be used to hide poor choices. A company could use it to avoid showing things like high-interest loans or aging equipment that will be costly to replace.Recommended: How to Calculate Cash Flow (Formula & Examples) 

Pros and Cons of Using EBITDAR

EBITDAR vs EBITDA

Example of EBITDAR

Company X income statement for 2020:

The Takeaway

EBITDAR, or earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs, is a valuation metric of a firm’s profitability without considering the tax rate and the capital structure of the company. It aims to measure a company's profitability from its core operations.While similar to EBITDA, EBITDAR goes a step further by removing the effects of rent or restructuring costs. This makes it a better tool for companies that have non-recurring or highly variable rent or restructuring costs, such as casinos and restaurants.Calculating EBITDAR can be helpful for seeing how your business performs from one quarter or year to the next, as well as how it compares to other businesses in your industry. It may also come into play if you’re applying for a business loan. Banks and other lenders often look at EBITDAR (or EBITDA) and compare it to the loan payment. They want to know that the business is generating more cash flow (EBITDAR/EBITA) than the amount of the loan payments.

Small Business Loan Tips 

  1. Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders.
  2. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.
  3. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

Photo credit: iStock/Inside Creative House
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.LCSB0322008

Frequently Asked Questions

What is the difference between EBITDAR and EBITDA?
Is EBITDAR the same thing as gross profit?
What is the formula for calculating EBITDAR?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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