Meaning and definition of EBITDARM
Short for Earnings before Interest, Taxes, Depreciation, Amortization, Rent and Management fees, EBITDARM refers to a financial performance measure which is used in comparison to more common measures like EBITDA in situations where the rent and management fees of a company represent a larger-than-normal percentage of operating costs.
As explained by Investopedia, EBITDARM is not a measure in accordance with GAAP (Generally Accepted Accounting Principles), rather is used for internal analysis and for presenting it to investors and creditors. Moreover, it is also reviewed by credit rating agencies while assessing the overall debt servicing ability and credit rating of a company, which is an important factor for many companies presenting this measure carry high debt loans.
Above all, measures like EBITDARM are most useful to investors if they are evaluated in conjunction with net earnings and more refined non-GAAP measures like EBIT and EBITDA.
Unlike the lengthy acronym, the computation of EBITDARM is not as lengthy and complicated. The main steps involved in calculation of EBITDARM include:
- Compute the net income by calculating the difference between total income and total expenses. The total income can be defined as the amount of money received for services, labor, and sale of goods. Total expenses, on the contrary, are the incurred on use of an asset or incurring a liability.
- Determine the amount of income taxes, which is the total amount of taxes paid to federal state and local governments.
- Determine the interest charges, which include the fee paid to the companies for using the credit or currency.
- The next step is to establish the depreciation costs. The term depreciation is used to define a cash or non-cash asset that loses value over time either through aging, wear and tear or the assets getting obsolete.
- Going further, estimate the amount of amortization, rent for building and equipment, and the cost of management fees.
- As a final step, add up all the expenses, i.e. depreciation + interest + taxes + amortization + rent + management fees, and subtract it from the total revenue, thus reaching EBITDARM.
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