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.
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.