What is EBITDARM and How Is It Calculated?
Explore EBITDARM, a specialized financial metric used to assess a firm's operating performance independent of its real estate or management arrangements.
EBITDARM, or Earnings Before Interest, Taxes, Depreciation, Amortization, Rent, and Management Fees, is a financial metric used to evaluate a company’s operating performance. It is an extension of the more common EBITDA, designed for specific industries where rent and management fees are significant and variable costs. By excluding these items, analysts can compare the core performance of companies that may have very different asset ownership and management structures.
The EBITDARM Calculation
The calculation of EBITDARM can start from a company’s net income. The formula is: Net Income + Interest Expense + Tax Expense + Depreciation + Amortization + Rent Expense + Management Fees. An alternative starting point is operating income, or EBIT (Earnings Before Interest and Taxes), which simplifies the formula to: EBIT + Depreciation + Amortization + Rent Expense + Management Fees.
To illustrate, consider a restaurant with a net income of $150,000 for the year. Its income statement shows an interest expense of $20,000, taxes of $40,000, and depreciation of $30,000. The company also has amortization of $10,000, pays $120,000 in annual rent, and incurs $50,000 in management fees.
Using the formula, the EBITDARM is calculated by adding these expenses back to the net income of $150,000. The $20,000 in interest, $40,000 in taxes, $30,000 in depreciation, $10,000 in amortization, $120,000 in rent, and $50,000 in management fees are added. The resulting EBITDARM is $420,000.
EBITDARM is a non-GAAP (Generally Accepted Accounting Principles) metric, so its calculation is not standardized by accounting regulators. When a public company discloses a non-GAAP figure like EBITDARM, the U.S. Securities and Exchange Commission (SEC) requires it to provide a reconciliation. This shows how the number was derived from the most directly comparable GAAP measure, such as net income.
Understanding the “R” and “M” Adjustments
The adjustment for rent (“R”) is made to standardize comparisons between companies with different real estate strategies. One business may purchase its properties, resulting in mortgage interest and depreciation, while another might lease its locations, leading to significant rent expenses. By adding back rent expense, EBITDARM allows an analyst to evaluate the operational profitability of both businesses, neutralizing the impact of their real estate financing decisions.
The “M” adjustment for management fees addresses differences in operational structure. An owner-operated business might not pay a formal management fee, while a franchised or third-party managed entity will have a distinct line item for fees paid to a parent company. Adding this fee back allows for a direct comparison of how efficiently the business assets are generating revenue, independent of the management compensation model.
Industry-Specific Applications
EBITDARM’s use is concentrated in industries where property leasing and varied management structures are common, such as the hospitality sector. Hotels, resorts, and casinos rely on this figure because one property might be owned outright while a competitor operates in a leased building under a management contract. EBITDARM enables an investor to look past these structural differences and assess the earning power of each property.
The healthcare industry, particularly sectors like senior living facilities and hospitals, also finds EBITDARM useful. The ownership and operating models for these facilities can vary, with some entities owning their real estate and others using long-term lease agreements. By normalizing for rent and management costs, stakeholders can better value a facility based on its core performance in providing patient care and related services.
The restaurant and retail industries use EBITDARM when analyzing franchise operations or corporate-owned chains. A parent company may want to assess the performance of two different store locations, such as one in a high-cost leased space versus another in a company-owned building. Using EBITDARM, the company can remove the variable real estate costs to determine which location is more efficient at selling goods or food.