Profitability ratios Print Email

What is OIBDA?

OIBDA (operating income before depreciation and amortization) is a non Generally Accepted Accounting Principle related measurement of finance based performance utilized by entities to display profitability in continuing business related activities that does not take into consideration the effects of tax based structure and capitalization.

At times OIBDA also does not take items like changes in accountancy principles/standards that do not indicate core results of operating, losses/earnings of subsidiaries and income generated from operations of subsidiaries that were discontinued.

This particular measure is becoming prominent as entities are distancing from utilizing earnings before taxes, amortization, interest and depreciation. Both these measures are more or less similar. The only difference comes in terms of income related numbers used by both the measures. As far as OIBDA is concerned, the calculation is done using Generally Accepted Accounting Principle net operation income whereas in EBITDA, the same is done using GAAP net income.

Therefore, for a public company, it is always better to report earnings based on OIBDA calculation as it is always higher than any other figure. The traditional procedure takes each and every expense into consideration, whereas OIBDA does not follow that method and reports only those expenditures that are directly related to the regular operation of any business such as raw material costs, shipping fee and employee salaries. So, if a public company is looking to impress the stakeholders, then it is advisable that it reports earnings after calculating OIBDA.

OIBDA Calculation (formula)

OIBDA = Operating income + Depreciation + Amortization

The Advantages for Public Companies to Report Earnings after OIBDA Calculations

Earnings related reports issued by public companies are usually considered to be their report cards., Each and every public company trading in the stock market releases a detailed report for its stockholders on a quarterly basis and it is through this report that it offers its stakeholders with details such as the amount of money earned during the three month period, amount that was spent by the company and the amount of money that now remains with it (i.e. profit).

The primary aim of this report is to make existing investors happy and also draw the attention of new investors towards the performance of the company. In addition to this, it is through these reports that a company acquires its OIBDA (operating income before depreciation and amortization) figure.

By opting to register earnings in the form of operating income before depreciation and amortization, an entity can get rid of a number of non-operating expenditures like long-term investments in equipment, tax related deductions and any sort of investments in ‘intangible’ assets such as trademarks as well as further add these entire loses all over again into the ‘profit’ column.

In order to determine why OIBDA is of relevance, one needs to understand the manner in which business accountancy works. Ideally, if an accountant wishes to do calculations to figure out the exact profit amount, he/she would refer to GAAP that has been created by the FASAB (Federal Accounting Standards Advisory Board). He would first take gross income into account and then deduct all the expenses to find out the profit amount. But in actual business practice, not every expense and income is treated on an equal basis. Accountants must take operating expenses and income as well as non-operating expenses and income into account.

Since many entities as well as investors are of the view that it is merely operating profit that provides a real indication of an entities value as well as everything else, it is necessary to calculate OIBDA.

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