What Is EBITDARM?
EBITDARM (earnings before interest, taxes, depreciation, amortization, rent, and management fees) is a selective earnings metric employed to measure the financial performance of certain companies. EBITDARM is compared to more common measures, such asEBITDA,when a company's rent andmanagement feesrepresent a larger-than-normal percentage of operating costs.
Key Takeaways
- EBITDARM stands for earnings before interest, taxes, depreciation, amortization, rent, and management fees and is a non-GAAP earnings metric used to measure financial performance.
- The measure is helpful when analyzing companies whose rent and management fees make up asubstantial amount of operating costs.
- EBITDARM is often used to make earnings more comparable across companies with vastly different operating costs.
- Companies that disclose non-GAAP metrics such as EBITDARM must show how these numbers contrast with the most directly comparable GAAP financial measure.
Understanding EBITDARM
Investors have several financial metrics at their disposal to analyzethe profitabilityof a company. Many focus on simple earnings ornet income. Other times, it can be helpful to include or exclude particularline items to gauge performance.
EBITDARM is an extension of EBITDA, which is short for earnings beforeinterest, taxes, depreciation, and amortization. It is a formula designed to evaluate a company's performance and its ability to make money without factoring in financing and accounting decisions or tax environments—expenses not considered a part of operations.
Where EBITDARM differs is that it also strips out rental and management fees when calculating profitability. This is useful when analyzing companies wheresuch fees make up asubstantial amount of operating costs.
Real estate investment trusts (REITs), companies that own or fund income-generating properties, and healthcare companies (such as hospitals or nursing facility operators) tick this box as these industries often lease the spaces they use, meaning that rent fees can become a majoroperating cost. EBITDARM allows a better view of these companies'operational performance by stripping out sometimes unavoidable fixed expenses that eat into profit.
Adjusting for expenses related to owned and rented assets make earnings more comparable across companies that have differences in the amount of property they lease or own.
EBITDARM is generally calculated as follows:
- EBITDARM = net income + interest + taxes + depreciation + amortization + rent and restructuring + management fees
EBITDARM Requirements
Not all companies will report EBITDARM. This metric and other similar types of adjusted earnings figures are not in accordance with generally accepted accounting principles (GAAP).
Though not compulsory, this metric does pop up in financial statements, prompting the Securities and Exchange Commission (SEC) to lay out some rules on how it must be reported. The SEC requires companies to report their earnings based on GAAP. If they also report EBITDARM and other non-GAAP financial measures, they must show how these numbers contrast with the most directly comparable GAAP financial measure.
Benefits of EBITDARM
Measures that involve adjustments to operating income are most informative to investors if they are examined in conjunction with net earnings and more refined non-GAAP measures, such as EBITDA andEBIT (earnings before interest and taxes). They are also helpful in comparisons of companies operating within the same industry sector, including, for example, one that owns its property and one that leases it.
EBITDARM may be measured against rent fees to see how effectivecapital allocationdecisions are within the company. It is also commonly used to review a company's ability to service debt, especially by creditrating agencies(CRAs).
Many of the companies that present this measure carry high debt loads. Analysts and investors can gauge the overall level and trend of EBITDARM as well as use it to calculate debt service coverage ratios such as EBITDARM-to-interest and debt-to-EBITDARM.
Criticism of EBITDARM
Criticisms of adjusted earnings figures such as EBITDA, EBITDAR, and EBITDARM are plentiful. They include concerns that the adjustments are distortive because they do not provide an accurate picture of a company's cash flow, they are easy to manipulate, and they ignore the impact of real expenses, including fluctuations in working capital.
Critics have also expressed concerns that by adding back depreciation expenses, companies and analysts ignore recurring expenses for capital spending.
