What it means
The letters stand for earnings before interest, taxes, depreciation, amortisation and rent. Adding back rent removes the difference between a company that rents its shops, hotels or aircraft and one that owns the same assets outright.
Owners pay interest and depreciation, which are already added back in EBITDA, whereas renters pay rent, which is not, so EBITDAR levels the field. The measure is especially popular in retail, restaurants, hotels, airlines and healthcare, where leased property is a huge part of the cost base.
Analysts use it to judge operating performance without the distortion of whether a chain bought or leased its locations. In some sectors the "R" is also read as restructuring or reorganisation costs, so the definition should always be checked.
Lenders and rating agencies often combine EBITDAR with rent to assess how heavily a business relies on leases. A common approach is to compare EBITDAR with the sum of interest and rent, which treats the rent as if it were another form of financing cost.
This captures commitments that older accounting rules kept off the balance sheet. Accounting rules for leases have changed over the years, so many leases now appear on the balance sheet and the rent line in the income statement can look different from before.
That makes it even more important to see how a company defines EBITDAR and to check that comparisons use the same treatment. As with other adjusted measures, it is not an official accounting figure.
The main limitation is that rent is a real, recurring cash cost. A business with EBITDAR of $1,200,000 but rent of $300,000 does not have $1,200,000 of earnings available to pay interest or dividends, so the measure should never be read as cash profit.
A related idea is to use EBITDAR in a leverage ratio. Some lenders divide debt plus eight times annual rent by EBITDAR, which treats the lease commitments as if they were borrowings.
The multiplier of eight is a rule of thumb used by some analysts, and rating agencies and banks sometimes choose different multipliers.
In practice
Real-world examples.
Example
A hotel group that leases most of its buildings is compared with a rival that owns its hotels. Analysts use EBITDAR to judge both on the strength of their trading, not on property ownership. The same approach lets them rank a leasing-heavy chain against an owner-operator fairly.
Example
A regional airline rents its aircraft from a leasing company. Its lenders look at EBITDAR against interest plus rent to check that the airline can meet all of its fixed commitments.
Example
A chain of fitness clubs plans to open ten new sites. The finance team uses EBITDAR per site to decide which locations are worth leasing before they negotiate the rent. Sites that cannot reach a sensible return at the landlord's asking rent are dropped from the list.
Formula
Calculation
EBITDAR = EBITDA + Rent expense
EBITDA = Net income + Interest + Taxes + Depreciation and amortisation
Worked example for a restaurant chain:
Net income: $400,000
Interest: $120,000
Taxes: $130,000
Depreciation and amortisation: $250,000
EBITDA = $400,000 + $120,000 + $130,000 + $250,000 = $900,000
Rent expense: $300,000
EBITDAR = $900,000 + $300,000 = $1,200,000
To see how rent changes the picture, compare the chain with a rival that owns its restaurants. The owner has EBITDA of $1,000,000 and no rent, so its EBITDAR is also $1,000,000. Our chain's EBITDAR of $1,200,000 is higher, but its EBITDA of $900,000 is lower, which shows how the choice of measure can reverse the ranking.Case study
Seen in the real world.
This is an illustrative story with invented names. Maple Row Dining, a fictional restaurant chain, reported EBITDA of $900,000 and rent of $300,000, so its EBITDAR was $1,200,000. A potential investor compared it with Oakfield Kitchens, which owned all its restaurants.
At first glance Oakfield looked more profitable on EBITDA because it paid no rent. After using EBITDAR for both, the two businesses looked almost the same, and the investor realised the gap came from property ownership rather than from better cooking or service.
The investor concluded that the chain's operations were actually stronger than Oakfield's. The remaining question was whether the rent was fair, so the investor reviewed the lease terms and found that rent was 25% of EBITDAR, which seemed reasonable for the sector.
Watch out
Common mistakes.
- Treating EBITDAR as cash profit. Rent is a genuine cash cost, so EBITDAR overstates what is left for lenders and owners.
- Comparing EBITDAR from one company with EBITDA from another. The two figures are built differently and are not interchangeable.
- Assuming the "R" always means rent. Some companies use it for restructuring, so check the definition before comparing.
Questions
People also ask.
Why do lenders like EBITDAR?
It helps them judge a borrower's total fixed commitments, including leases, alongside conventional debt.
Is EBITDAR used outside leasing-heavy industries?
Rarely. It is mainly found in retail, hospitality, transport and healthcare.
How does EBITDAR relate to EBITDARM?
EBITDARM goes one step further by adding back management fees as well as rent.
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