What is EBITDARM?
EBITDARM stands for Earnings Before Interest, Taxes, Depreciation, Amortization, Rent, and Management Fees. It is a financial metric that allows the evaluation of a company’s operating performance. In most aspects, EBTIDARM is similar to EBITDA. It is considered as an extension of EBITDA and is when rent and management fees represent a substantial percentage of the company’s operating costs.
The financial metric is frequently used by private equity firms to evaluate the target company for possible investment and by credit rating agencies to assess the company’s debt servicing ability.
The figure can be derived from EBITDA by adding rent and management fees:
Reasons to Use EBITDARM
EBITDARM is a viable alternative to EBITDA for companies in which lease and management fees account for most of their operating costs. With private companies that have an owner-operator, there may be excessive management fees charged that need to be “normalized” out of the financial statements. The reason they are backed-out is because the future operator of the business would not have to pay such excessive fees when the current owner is no longer there.
Equivalently to EBITDA, EBITDARM is a proxy for the company’s cash flow. It can be used for the evaluation of the non-profitable companies. It is also useful in comparing the core operations of companies within the same industry but with different operations (e.g., one company occupies its own property, another uses a rental property).
Problems With EBITDARM
Although it is a quite popular measure among professionals, there are many critics of the financial metric. Generally, it comes with the same drawbacks as EBITDA.
EBITDARM is not a recognized metric by Generally Accepted Accounting Principles (GAAP) or International Financing Reporting Standards (IFRS). Many critics point out that it does not provide an accurate overview of the company’s cash flows as some recurring expenses are not included in its computation. In addition, it can be easily manipulated by the company’s management.
Still, EBITDARM is a useful financial metric. However, an analyst must be aware of its disadvantages. Using the metric in conjunction with the other financial performance measures such as the company’s cash flows and net earnings is advised to get a clear insight into its underlying economics.
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