What is OIBDA?
OIBDA is an abbreviation for Operating Income Before Depreciation and Amortization. It is a non-GAAP measure of the financial performance of a company during a specific period of time while excluding the effects of capital spending and capital structure. It considers the incomes and expenses from the core activities of the company that can be used to pay debt and finance working capital requirements.
Since OIBDA is a non-GAAP method, companies are not required to report the figure as part of their disclosure in the financial statements. Investors use the OIBDA metric to get an overview of how efficiently the company runs its core operations based on its ability to manufacture and sell goods to consumers.
- OIBDA is a financial performance metric that considers the core activities of the organization during a specific period, usually a year.
- It segregates the operating and non-operating activities in order to obtain the true value of the organization.
- Analysts use OIBDA to calculate the true value of the company since it excludes non-operating expenditures.
Formula and Example
The formula for OIBDA is written as follows:
Consider the following financial information, as reported by XYZ Limited:
- Operating income: $100,000
- Depreciation: $20,000
- Amortization: $10,000
Using the information above, we can calculate the company’s OIBDA as follows:
OIBDA = $100,000 + $20,000 + $10,000 = $130,000
Where the operating income excludes items such as tax and interest, the items are ignored. Analysts exclude depreciation and amortization when calculating the operating income to get a clear picture of the income from the core operations of the company, and thus must be added back. Monitoring changes in the metric can provide analysts with important indicators of changes in the company’s core operations.
Why OIBDA Matters
Publicly traded companies are required to prepare earnings reports every quarter of the year, detailing the revenue it earned during the period, the expenses incurred, and the amount that remained as profit. The reports are provided to stockholders and investors, and companies use them to attract potential investors.
Companies can choose among different metrics, such as OIBDA and EBITDA, to prepare their earnings reports. By choosing OIBDA over EBITDA, it ignores the non-operating expenses that are not directly related to the core operations of the business and only focuses on the incomes that are directly related to the primary business activities.
Traditionally, companies were required to follow the GAAP regulations when calculating net income. However, the problem with such a method is that it does not distinguish between operating and non-operating incomes and expenses.
OIBDA, a non-GAAP method, eliminates the non-operating costs to show the actual operating results of the company and how the value changes from one quarter to the other. The OIBDA method separates operating and non-operating incomes and expenses and only reports incomes and expenses that directly relate to the core operations of the business.
The standard calculation of net income using other methods such as EBITDA takes into account all expenses and deductions that dramatically lower the taxable income of the company. Therefore, the OIBDA earnings are almost always higher than the earnings calculated using other accounting methods. The higher earnings will not only please the shareholders and investors but also show the true value of the company and how earnings results change from one quarter to another.
Advantages of OIBDA
OIBDA considers all the operating costs of a business that directly relate to its daily operations. Some examples of operating expenses include salary paid to employees, expenses from buying raw materials, pension contributions, and shipping fees. The method excludes non-operating costs, such as amortization of long-term investments in trademarks and other intangible assets, tax deductions, etc., which are not related to the daily operations of the business.
The OIBDA method gives a higher earnings figure for a given year compared to other earnings calculations. It is mainly because the method excludes non-operating expenses, which reduce overall revenues. Stockholders and potential investors will need to compare earnings using the same calculation method across periods to get a reading on earnings trends.
Disadvantages of OIBDA
Unlike EBITDA, OIBDA is not GAAP-compliant; there are no specific rules that guide the items to be included or excluded in its calculation. It means that there are likely to be multiple variations of how the reported earnings are calculated across companies, making it difficult to compare the performance of one entity to another. Accountants may also get creative by manipulating figures for their own benefit.
OIBDA vs. EBITDA
OIBDA is continuously gaining popularity as more companies move away from EBITDA. OIBDA and EBITDA share a lot of similarities, but they differ in the numbers that they use. OIBDA considers only the core operating activities of the company by calculating the net operating income and adding back depreciation and amortization.
On the other hand, EBITDA does not segregate operating and non-operating activities. EBITDA is calculated by taking the GAAP net income and adds back depreciation and amortization, tax deductions, and interests.
OIBDA, unlike EBITDA, excludes non-operating income from operating income because it does not occur every year, and the separation ensures that only the income from regular operations of the business is included in the total income. It also excludes cash used to service debt, distributions, and other non-operating expenses.
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