EBITAR: A Deeper Dive into Operational Profitability

EBITAR, short for Earnings Before Interest, Taxes, Amortization, and Restructuring costs, is a financial metric used to evaluate a company’s operational performance by excluding certain expenses from its earnings. It builds upon the more common metric of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by adding back restructuring costs. This allows analysts and investors to gain a clearer picture of core business profitability, especially when a company has undergone significant restructuring activities.

Why Use EBITAR?

The primary purpose of EBITAR is to provide a more normalized view of earnings. Restructuring costs, such as severance packages, facility closures, and relocation expenses, can significantly impact a company’s profitability in a given period. However, these costs are often considered one-time or non-recurring events. By excluding them, EBITAR reveals the underlying profitability of the business operations more accurately.

EBITAR is particularly useful in the following situations:

• Comparing Companies: It allows for a more level playing field when comparing companies in the same industry, especially those that have undergone different levels of restructuring.
• Analyzing Turnaround Situations: EBITAR can highlight improvements in operational efficiency during a turnaround, even if the company is still incurring significant restructuring expenses.
• Evaluating Acquisition Targets: Potential acquirers use EBITAR to assess the target company’s core earning power, stripped of the noise from restructuring initiatives that may be irrelevant post-acquisition.
• Internal Performance Measurement: Management can use EBITAR to track the success of restructuring efforts by monitoring improvements in core operational profitability.

Calculating EBITAR

The formula for calculating EBITAR is as follows:

EBITAR = Net Income + Interest + Taxes + Depreciation + Amortization + Restructuring Costs

Alternatively, you can start with EBITDA and simply add back the restructuring costs:

EBITAR = EBITDA + Restructuring Costs

Restructuring costs are typically found in the company’s income statement or its notes to the financial statements. Understanding what constitutes “restructuring costs” is critical for accurate calculation.

Limitations of EBITAR

While EBITAR offers valuable insights, it is not a perfect metric and has limitations:

• Non-GAAP Measure: EBITAR is not a Generally Accepted Accounting Principles (GAAP) metric. This means there is no standardized definition of restructuring costs, and companies have some discretion in what they include. This lack of standardization can make comparisons across companies challenging.
• Ignores Capital Expenditures: Similar to EBITDA, EBITAR does not account for capital expenditures (CAPEX) which are essential for maintaining and growing the business.
• Still Excludes Important Expenses: Even with the addition of restructuring, EBITAR still excludes interest and taxes, which are real and significant cash outflows.
• Potential for Manipulation: Because it is a non-GAAP measure, there’s a risk that companies might manipulate the definition of “restructuring costs” to artificially inflate their EBITAR.

Conclusion

EBITAR is a useful tool for analyzing a company’s operational profitability, particularly when assessing the impact of restructuring activities. However, it should be used in conjunction with other financial metrics and a thorough understanding of the company’s specific circumstances. Investors and analysts should carefully examine how a company defines restructuring costs and consider the limitations of EBITAR before drawing conclusions about its financial health.