What Is EBITDAR? Definition, Formula, and Examples

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EBITDAR stands for earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs. It measures a company’s operating earnings before financing costs, taxes, noncash asset charges, and one of two further items, rent or restructuring charges. The final “R” does not always mean the same thing. When analysts use the metric to compare businesses that lease many of their locations or equipment, the R means rent. When they use it to look at a company coming out of a reorganization, the R means restructuring. Some companies exclude both. Before comparing EBITDAR figures, find out which definition sits behind each one.

EBITDAR is a non-GAAP measure. It does not appear as a line on the income statement, but you can calculate it from the income statement and the notes to the financial statements.

What Is EBITDAR?

EBITDAR belongs to the same family of metrics as EBIT and EBITDA. Each one starts from a company’s earnings and strips out a set of costs to isolate a particular view of performance:

• EBIT removes interest and taxes, leaving operating profit.
• EBITDA also removes depreciation and amortization, the noncash charges that spread the cost of long-lived assets over time.
• EBITDAR goes one step further and removes rent or restructuring costs.

The reasoning behind the extra adjustment differs depending on which R is in play.

Rent. Two businesses can run nearly identical operations while paying for their properties in completely different ways. One buys its buildings or aircraft, financing them with debt. The other leases them. The owner’s costs show up as depreciation and interest, both of which EBITDA already excludes. The lessee’s costs show up as rent, which EBITDA keeps. The result is that EBITDA makes the owner look more profitable than the lessee even when the underlying operations are identical. Adding rent back removes that distortion. Rent also varies with location: a restaurant in Manhattan pays far more for the same square footage than one in Omaha, and EBITDAR lets an analyst look at the operations without that difference.

Restructuring. A company that has closed plants, cut staff, merged divisions or reorganized under a formal plan records restructuring charges such as severance, contract termination costs and facility exit costs. Those charges can swamp the results of the year they hit, making year-over-year comparisons hard to read. Excluding them gives a view of the business the company expects to run after the restructuring is finished.

How EBITDAR Works

Calculating EBITDAR

The most direct formula starts from EBITDA:

EBITDAR = EBITDA + Rent costs (and/or Restructuring costs)

If you are starting from the bottom of the income statement, the full build-up is:

EBITDAR = Net income + Interest + Taxes + Depreciation + Amortization + Rent or Restructuring

You can also start from EBIT:

EBITDAR = EBIT + Depreciation + Amortization + Rent or Restructuring

All three routes give the same answer as long as the inputs are consistent. The practical difference is where the figures are easiest to find. Depreciation and amortization are often combined on the income statement or shown only in the cash flow statement. Rent may be buried inside operating expenses and disclosed in the lease note. Restructuring charges are often a separate line item, but they can also be spread across cost of sales and operating expenses, with the breakdown given in a note.

Each component has a reason for being excluded.

Earnings

Most build-ups start from net income, the bottom line after every expense. Some analysts start from operating income instead, which skips the interest and tax step. Whichever starting point you choose, use the same one for every company you compare.

Interest expense

Interest is the cost of borrowed money. It depends on how a company finances itself, not on how well it runs its stores, flights or casino floors. A company funded mostly with debt and one funded mostly with equity can have identical operations and very different interest bills. Removing interest puts them on the same footing.

Tax expense

Income taxes depend on jurisdiction, past losses, credits and tax planning. Removing them focuses the measure on operations. This is also a point of debate: a company can plan to reduce its taxes, and some argue that the tax bill should count against management when judging results internally.

Depreciation

Depreciation allocates the cost of a tangible asset, such as a building, an aircraft or kitchen equipment, over its useful life. It is a noncash charge in the period it is recorded, because the cash left when the asset was bought. Different depreciation methods and useful-life estimates can produce different charges for similar assets, which is one reason analysts add depreciation back when comparing companies.

Amortization

Amortization does the same thing for intangible assets such as patents, licenses, software and acquired customer relationships. Like depreciation, it is a noncash charge that reflects past spending.

How lease accounting affects the “R”

Under IFRS 16, which took effect for annual periods beginning on or after January 1, 2019, most leases are brought onto the balance sheet as a right-of-use asset and a lease liability. The lessee no longer records a single rent expense for those leases. Instead it records depreciation on the right-of-use asset and interest on the lease liability. Both of those already sit outside EBITDA. For a company reporting under IFRS, much of the rent adjustment is therefore built into EBITDA. What remains in operating expenses are the costs IFRS 16 still expenses directly: short-term leases, low-value leases and variable lease payments not tied to an index or rate (for example, rent based on a percentage of store sales).

Under U.S. GAAP’s ASC 842, effective for public companies in fiscal years beginning after December 15, 2018, operating leases also go onto the balance sheet. However, the income statement still shows a single, generally straight-line operating lease cost within operating expenses. For a U.S. GAAP reporter with operating leases, EBITDA still includes that cost, and the “R” adjustment still does real work. Finance leases under ASC 842 are treated more like IFRS 16 leases, with amortization and interest recorded separately.

As a result, EBITDA figures for an IFRS reporter and a U.S. GAAP reporter with similar lease portfolios can differ purely because of accounting standards. EBITDAR, calculated by adding back the full lease cost under each framework, is one way to bring them back onto a comparable basis.

Interpreting EBITDAR

On its own, an EBITDAR figure says little. It becomes useful in three kinds of comparison.

Against peers. EBITDAR lets you compare operating performance across companies that own versus lease, or that operate in high-rent versus low-rent markets. If two hotel operators have similar EBITDAR margins but very different EBITDA margins, the gap is coming from how they hold their properties, not from how they run them.

Against the company’s own history. For a business that has restructured, EBITDAR excluding restructuring charges lets management and investors see whether the operations themselves improved or deteriorated.

Against fixed obligations. Lenders and credit analysts use EBITDAR as the numerator in ratios that measure how comfortably a company can pay both its interest and its rent.

The EBITDAR margin expresses the figure as a share of revenue:

EBITDAR margin = EBITDAR ÷ Revenue × 100

There is no universal “good” EBITDAR margin. It depends heavily on the industry and on how much of the cost base is rent. A margin is most informative when compared with direct competitors calculated on the same definition, or with the same company’s prior periods.

Why Is EBITDAR Important?

It is the basis for rent-adjusted credit analysis

A lease is a fixed obligation much like debt. The company has to pay it regardless of how many customers walk in. Analysts who look only at debt and interest can understate how much fixed obligation a heavily leased company carries. Two measures address this.

Fixed-charge coverage (EBITDAR coverage):

EBITDAR coverage = EBITDAR ÷ (Interest expense + Rent expense)

This shows how many times a company’s earnings before interest and rent cover its interest and rent payments combined. Definitions vary; some lenders also include scheduled principal payments or other fixed charges in the denominator, and a loan agreement’s definition is the one that governs a covenant.

Lease-adjusted leverage:

Lease-adjusted leverage = (Debt + Lease obligations) ÷ EBITDAR

The lease obligations can be the lease liability reported on the balance sheet under current standards or, as in older practice, an estimate derived by multiplying annual rent by a fixed multiple (8x is one convention that has been used). Pairing EBITDAR in the denominator with lease obligations in the numerator keeps the ratio consistent: rent is added back to earnings because the leases are counted as debt-like obligations. Using EBITDAR while ignoring lease obligations would flatter a heavily leased company.

Who Uses EBITDAR?

EBITDAR shows up most often in industries where leased assets are a major part of the cost base or where companies differ widely in whether they own or lease.

Airlines. Carriers buy aircraft with debt, lease them from leasing companies, or both. In airline analysis the R usually refers to aircraft rent (sometimes together with other rent such as airport facilities). EBITDAR lets analysts compare carriers’ operating performance regardless of fleet financing, and lease-adjusted leverage gives a fuller picture of their fixed obligations.

Casinos and gaming. Some casino operators own their properties, while others lease them, sometimes from real estate companies that buy casino properties and lease them back to the operator. Rent on those leases can be a large fixed cost, and EBITDAR lets investors compare owners with lessees.

Hotels. Hotel companies may own properties, lease them, or manage and franchise them for others. EBITDAR helps compare the operating results of these different setups.

Restaurants and retail. Chains with hundreds or thousands of leased locations face large occupancy costs that vary by market. EBITDAR lets analysts compare store-level operating performance across chains and regions.

Healthcare facilities. Operators of nursing homes, senior housing and similar facilities often lease their buildings from real estate investors, and rent coverage is a standard way to assess whether the operator can sustain its lease payments.

Companies after a reorganization. In any industry, a company emerging from a restructuring may present EBITDAR (with the R meaning restructuring) to show results excluding the one-time costs.

EBITDAR is not required in public financial statements. Many companies calculate it only for internal reporting, for example each fiscal quarter to compare subsidiaries or locations that pay very different rents. Companies that do present it publicly as a non-GAAP measure in SEC filings or earnings releases must reconcile it to the most directly comparable GAAP measure, usually net income, and must not give it greater prominence than the GAAP figure.

Example of EBITDAR

Building up from net income

Consider a hypothetical restaurant group with the following annual results. All figures are illustrative.

Step 1: Operating income (EBIT). Total operating expenses are $3,200,000 + $2,800,000 + $900,000 + $1,100,000 + $400,000 + $50,000 + $150,000 = $8,600,000.

EBIT = $10,000,000 − $8,600,000 = $1,400,000

Step 2: Net income. Subtract interest and taxes.

Net income = $1,400,000 − $300,000 − $250,000 = $850,000

Step 3: EBITDA. Add back depreciation and amortization.

EBITDA = $1,400,000 + $400,000 + $50,000 = $1,850,000

Step 4: EBITDAR. Add back rent.

EBITDAR (rent) = $1,850,000 + $900,000 = $2,750,000

If the company’s definition also excludes restructuring, add that back too:

EBITDAR (rent and restructuring) = $2,750,000 + $150,000 = $2,900,000

The margins are:

• EBITDA margin: $1,850,000 ÷ $10,000,000 = 18.5%
• EBITDAR margin (rent only): $2,750,000 ÷ $10,000,000 = 27.5%
• EBITDAR margin (rent and restructuring): 29.0%

The 1.5-point gap between the last two figures comes entirely from the definition. Comparing this company’s 29.0% with a competitor’s rent-only EBITDAR margin would overstate its advantage.

Owning versus leasing

Now compare two hypothetical restaurant groups whose operations are identical in every way except how they hold their buildings. Both have revenue of $10,000,000 and the same food, labor and other operating costs ($7,100,000 combined). Neither has restructuring charges, and for simplicity neither has amortization.

• Group A leases its restaurants and pays $900,000 in rent. It has $300,000 of depreciation on equipment.
• Group B owns its restaurants. It records $500,000 of depreciation on the buildings plus the same $300,000 on equipment, and pays $400,000 of interest on the mortgages used to buy the buildings.

On EBITDA, Group B looks 45% more profitable. That gap is entirely the result of B’s building costs being classified as depreciation and interest while A’s are classified as rent. On EBITDAR, the two are identical, which matches the reality that their restaurants perform the same.

Neither metric settles which group is the better investment. Group B carries mortgage debt; Group A carries lease commitments. Both are fixed costs that must be paid, and weighing them is the job of coverage and leverage ratios.

Coverage and leverage

Return to the first restaurant group, with rent-only EBITDAR of $2,750,000, interest of $300,000 and rent of $900,000. Assume it also has $3,000,000 of debt.

EBITDAR coverage = $2,750,000 ÷ ($300,000 + $900,000) = 2.29x

The company’s earnings before interest and rent cover those two fixed charges a little more than twice.

Compare this with a measure that ignores rent. Interest coverage on an EBITDA basis would be $1,850,000 ÷ $300,000 = 6.17x, which gives a much more comfortable impression because it ignores $900,000 a year of lease obligations.

Leverage shows the same pattern. Debt to EBITDA is $3,000,000 ÷ $1,850,000 = 1.62x. Using the 8x-rent convention to estimate lease obligations ($900,000 × 8 = $7,200,000), lease-adjusted leverage is ($3,000,000 + $7,200,000) ÷ $2,750,000 = 3.71x. Using the lease liability from the balance sheet instead would give a different figure; the method needs to be stated alongside the result.

Limitations of EBITDAR

Rent and restructuring still cost cash. A company has to pay its landlord and its severance bills. EBITDAR shows what operations earn before those payments, not what is left after them. It is not a substitute for free cash flow, which accounts for the cash a business actually generates after operating costs and capital spending.

Restructuring is not always a one-time event. Some large companies reorganize repeatedly, closing units and cutting staff every few years. When restructuring recurs, it is effectively a normal cost of running the business, and excluding it every year overstates sustainable earnings. Repeated restructuring may also reflect management decisions that should count against results rather than be excluded from them.

Excluded costs can be controllable. Rent reflects choices about where to locate, how much space to lease and how to negotiate terms. A measure that strips rent out does not hold management accountable for those choices.

High rent can come with higher prices. The argument for adding back rent in expensive locations assumes that the rent is a cost disadvantage. However, businesses in high-rent areas often charge higher prices and earn more revenue per location. EBITDAR removes the higher rent but leaves the higher revenue in place, which can make a high-rent location look better than a like-for-like comparison would justify.

No standard definition. Because EBITDAR is non-GAAP, each company decides what goes into the R and whether other items are added back. Two companies’ published EBITDAR figures may not be comparable without adjusting them to a common definition.

Accounting standards affect the starting point. IFRS 16 already moves most lease costs out of EBITDA, while ASC 842 leaves operating lease cost inside it. Adding back rent the same way under both can double count or miss costs, so check what each company’s EBITDA already excludes.

It ignores the cost of the assets. Like EBITDA, EBITDAR excludes depreciation and amortization, so it does not reflect the need to replace aircraft, renovate hotels or refit restaurants. Asset-heavy businesses can show strong EBITDAR while needing large ongoing capital spending.

EBITDAR vs. Other Metrics

EBITDAR vs. EBITDA

The only difference is the R. For a company with little rent and no restructuring, EBITDA and EBITDAR are nearly the same; for a heavily leased company, EBITDAR can be much larger. EBITDA is far more widely used, and EBITDAR earns its place when owning versus leasing, or a recent restructuring, would otherwise distort the comparison. Some analysts prefer EBITDA because they want restructuring costs to count, on the grounds that the restructuring was a management decision.

EBITDAR vs. EBIT

EBIT is operating profit: it removes interest and taxes but keeps depreciation, amortization, rent and restructuring. That makes it a closer measure of accounting profit from operations, since it charges the business for wearing out its assets and for occupying its premises.

EBITDAR removes far more, including several noncash charges and potentially one-time costs. It is better suited to comparing operations across companies with different asset ownership. EBIT is better suited to judging whether operations are profitable after all the costs of running them.

EBITDAR vs. net income

Net income is the bottom line after every expense, cash or noncash, and the GAAP figure that drives earnings per share. Because it includes items shaped by financing, taxes and accounting choices, it can be hard to compare across companies, which is why EBIT, EBITDA and EBITDAR emerged. None of them replaces net income as the measure of what shareholders actually earned.

EBITDAR vs. EBIDA and other variants

EBIDA (earnings before interest, depreciation and amortization) keeps taxes in the calculation, which some analysts argue gives a more conservative view because taxes must be paid. Adjusted EBITDA is a broad label for EBITDA with company-chosen add-backs, which can include restructuring. If a company reports “adjusted EBITDA” that adds back restructuring charges, it may be close to the restructuring version of EBITDAR in substance. Compare the reconciliations, not the labels.

FAQs

The Bottom Line

EBITDAR matters most to analysts and lenders looking at airlines, casinos, hotels, restaurants, retailers and other heavily leased businesses. It puts owners and lessees on equal footing, but rent and restructuring remain real cash costs. Check which R each company uses and how its lease accounting works, then pair EBITDAR with coverage and lease-adjusted leverage ratios before judging whether a business can meet its fixed obligations.