What is EBITDAR?

What is EBITDAR?

What is EBITDAR?

Definition

EBITDAR is an acronym for earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs. The profit calculated in this manner can be used to analyze the performance of a company. EBITDAR is generally used in the context of companies that have unique rent costs or have recently undergone a restructuring.

What does EBITDAR mean?

Computing EBITDAR helps analysts to evaluate a firm’s operational performance. Note that the profits arrived at by using the EBITDAR formula exclude:

⇨ Interest

⇨ Taxes

⇨ Depreciation

⇨ Amortization

⇨ Restructuring or rent costs

Each of these expenses is not directly connected to a company’s operational performance. Hence, a review of EBITDAR can be a good way to conduct a fair comparison between different firms in the same industry.

Consider an example of two firms that manufacture the same product. One is a new company that was established two years ago. It has a low amount of debt, and it finances its operations primarily through equity.

The other is a firm that has been recently restructured and is required to charge off a significant amount in restructuring expenses every year. It also has a high interest cost burden.

How will the operational efficiency of these two firms be compared? EBITDAR provides a useful tool for this purpose as it excludes interest costs and restructuring costs in addition to taxes, depreciation, and amortization.

Example of EBITDAR

Snack-In-A-Box Inc. runs a chain of fast food restaurants across the country. It continually monitors the performance of each store to maximize its revenues and profits.

Rent costs often form a large part of each restaurant’s expenditure. But these are highly variable and depend upon the location. In big cities and prime areas, rent costs can be as much as 25% to 30% of a particular restaurant’s total costs. In other locations, rent accounts for only 5% to 10% of the monthly expenditure.

Snack-In-A-Box uses EBITDAR to compare the performance of its restaurants. As this figure excludes rent expenses as well as other non-operational costs, it allows for an equitable comparison between the company’s units.

Summary

EBITDAR helps in computing a company’s operational results. It is a useful figure for inter-firm comparisons as well as for comparing the performance of individual units within the same company in certain industries.