What it means
Operating income is the profit left after paying the normal costs of running the business, including depreciation and amortisation. Depreciation spreads the cost of physical assets such as machinery over their useful lives, while amortisation does the same for intangible assets such as licences and acquired brands.
These charges reduce profit but do not involve cash leaving the business in the current period. OIBDA adds back these two items to operating income.
The result shows how much the core business earns before accounting for the age and cost of its asset base. That makes it useful for comparing companies that have invested very differently in equipment.
OIBDA is closely related to EBITDA, which stands for earnings before interest, taxes, depreciation and amortisation. The difference is the starting point.
EBITDA starts from net profit and can include non-operating income, while OIBDA starts from operating income and so leaves out items such as investment gains or one-off non-operating items. Analysts use OIBDA to compare operating performance, to judge cash generation and to value companies, often with multiples based on enterprise value.
Lenders may set loan conditions using a similar measure. In capital-heavy industries, where depreciation is large, it gives a clearer view of day-to-day trading.
Like any adjusted measure, OIBDA has limits. It ignores the real cost of replacing equipment, which must eventually be paid for, and it is not defined by accounting standards, so companies may calculate it differently.
Managers should read it alongside capital spending, cash flow and net profit. Many lenders and acquirers still rely on it in practice.
Loan agreements often set limits such as debt of no more than a certain multiple of OIBDA, and buyers of businesses may offer a price based on a multiple of it. For that reason, finance teams should know exactly how their contracts define the measure and should keep a clear reconciliation to operating income.
In practice
Real-world examples.
Example
A cable television operator reports operating income of $40,000,000 and depreciation and amortisation of $60,000,000. Its OIBDA is $100,000,000. Investors use the figure to compare it with other cable companies, since the large depreciation charge on cables and equipment would otherwise make the comparison unclear.
Example
A mobile network owner wants to borrow to build new towers. The bank sets a limit based on debt of no more than 3 times OIBDA. With OIBDA of $50,000,000, the maximum borrowing is $150,000,000.
Example
A media company buys a rival and records large amounts of amortisation on acquired brands and customer lists. Its operating income falls, but OIBDA stays strong because the amortisation is a non-cash charge. The finance director uses OIBDA to explain that the underlying business has not weakened.
Formula
Calculation
OIBDA = operating income + depreciation + amortisation
A telecoms company has revenue of $10,000,000 and operating costs, before depreciation and amortisation, of $7,000,000. Depreciation and amortisation total $1,500,000. Operating income = 10,000,000 - 7,000,000 - 1,500,000 = $1,500,000. OIBDA = 1,500,000 + 1,500,000 = $3,000,000, which is an OIBDA margin of 3,000,000 / 10,000,000 = 30%.Case study
Seen in the real world.
Skyward Telecom is a fictional company used to illustrate OIBDA. In this illustrative story, it reported revenue of $200,000,000 and operating income of only $20,000,000 because it carried heavy depreciation of $50,000,000 on its network and amortisation of $10,000,000 on licences. A new investor thought the business was barely profitable and considered selling his shares.
The chief financial officer showed that OIBDA was 20,000,000 + 50,000,000 + 10,000,000 = $80,000,000, a margin of 40%. She then explained that capital spending to maintain the network was about $45,000,000 a year, leaving roughly $35,000,000 of cash generation before interest and tax. The investor realised that both measures told part of the story. She asked for the capital spending plan before making a decision, and she later built her own valuation using cash generation after capital spending.
Skyward now presents OIBDA, capital spending and operating income side by side in its results. This approach gives analysts a fair picture and avoids the impression that depreciation can be ignored.
Watch out
Common mistakes.
- Treating OIBDA as cash flow. It ignores capital spending, working capital and tax, all of which use cash.
- Assuming OIBDA and EBITDA are identical. They can differ when a company has non-operating income or expenses.
- Comparing OIBDA across companies without checking definitions. Firms may include or exclude different items.
Questions
People also ask.
What does OIBDA stand for?
It stands for operating income before depreciation and amortisation.
Why is OIBDA used in telecoms and media?
These industries have large asset bases and acquired intangibles, so depreciation and amortisation can hide underlying operating performance.
Is OIBDA a GAAP measure?
No, it is a non-GAAP measure, which means companies define and disclose it themselves with a reconciliation to reported figures, and regulators expect that reconciliation to be shown clearly.
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