What Is EBITDAL and How Is It Calculated?

EBITDAL stands for Earnings Before Interest, Taxes, Depreciation, Amortization, and Leases. It is a non-GAAP financial metric that provides a view of a company’s operating performance by isolating core results from the effects of financing decisions, accounting methods, and non-cash charges. This measure is an evolution of EBITDA, adapted to address significant shifts in how lease expenses are reported under new accounting regulations.

Defining the Components of EBITDAL

The starting point for EBITDAL is a company’s net income, which represents the profit after all expenses have been deducted. From this base, several items are added back to arrive at the final figure.

• Interest is the cost a company incurs for its borrowed funds. Adding this back removes the impact of financing decisions, allowing for a clearer comparison between companies with different debt levels.
• Taxes are the provision for income taxes. Removing this expense helps to normalize earnings and focus on operational efficiency before the effects of different tax policies and jurisdictions.
• Depreciation and amortization are non-cash expenses. Depreciation accounts for the value reduction of tangible assets, like buildings, while amortization applies to intangible assets, such as patents. Excluding them offers a picture of cash-generating ability from operations.
• Leases refer to the rent expenses a company pays for assets it does not own. This component was added in direct response to new accounting standards that changed how leases are reported on financial statements.

The Impact of Lease Accounting Standards

The “L” in EBITDAL was introduced because of major changes in lease accounting rules, specifically the implementation of ASC 842 and IFRS 16. Before these standards, companies could classify many leases as “operating leases,” which were treated as simple rental expenses. These payments were recorded on the income statement, but the underlying asset and liability did not appear on the balance sheet.

The new standards changed this practice by requiring companies to recognize most leases on their balance sheets. A company must now record a “right-of-use” (ROU) asset, representing its right to use the leased item, and a corresponding lease liability for its payment obligations. This change brought significant transparency to a company’s financial position.

This balance sheet recognition directly impacted the income statement. Instead of a single line item for rent expense, the cost of an operating lease is now often split into two components: amortization of the ROU asset and an interest expense on the lease liability. This reclassification can inflate traditional EBITDA because the old rent expense is replaced by amortization and interest, both of which are added back in an EBITDA calculation. EBITDAL was developed to counteract this distortion.

How to Calculate EBITDAL

There are two common starting points for the formula, depending on the information available on a company’s income statement. The most comprehensive method begins with Net Income.

EBITDAL = Net Income + Interest Expense + Tax Expense + Depreciation + Amortization + Lease Expense

Alternatively, if a company reports Operating Income (often labeled as EBIT), a simpler formula can be used. Since Operating Income already excludes interest and taxes, you only need to add back the non-cash charges and lease costs.

EBITDAL = Operating Income + Depreciation + Amortization + Lease Expense

To perform the calculation, you must locate these figures on a company’s financial statements. Net Income, Interest Expense, and Tax Expense are on the income statement. Depreciation and Amortization are often detailed in the statement of cash flows. The total lease expense can be found in the footnotes to the financial statements, which provide a breakdown of lease costs.

For example, assume a company reports a Net Income of $500,000. It shows an Interest Expense of $50,000 and a Tax Expense of $150,000. The statement of cash flows reveals Depreciation of $100,000 and Amortization of $25,000. The financial footnotes indicate a total Lease Expense of $75,000. The EBITDAL would be $500,000 + $50,000 + $150,000 + $100,000 + $25,000 + $75,000, resulting in an EBITDAL of $900,000.

Common Uses in Financial Analysis

One primary application of EBITDAL is in business valuation. Analysts often calculate a company’s enterprise value (EV) as a multiple of its EBITDAL. This EV/EBITDAL multiple can then be compared to the multiples of similar companies within the same industry to assess whether a company is valued appropriately. This method is particularly useful in sectors with heavy capital investment and significant leasing activities.

The metric is also valuable for ensuring comparability between companies. Consider two businesses with identical operations, where one company owns its facilities and the other leases them. The company that owns its building will have depreciation and interest expenses, while the leasing company will have rent expenses. EBITDAL normalizes these different ownership structures by adding back all of these costs, allowing an analyst to compare the core operational profitability of the two companies.

Lenders and creditors frequently use EBITDAL in debt covenants for loan agreements. A bank may require a borrowing company to maintain a specific leverage ratio, such as Total Debt to EBITDAL, below a certain threshold. This covenant provides the lender with assurance that the company’s operating cash flow is sufficient to cover its debt obligations.