Operating Income Before Depreciation and Amortization (OIBDA)
What is operating profit before depreciation and amortization (OIBDA)?
Operating income before depreciation and amortization (OIBDA) is a measure of financial performance used by companies to show the profitability of their main business activities. OIBDA excludes the effects of capital expenditures on fixed assetssuch as equipment, and interest expense related to debt repayment.
Sometimes the OIBDA may not include changes in accounting principles which are not representative of core operating results, revenues interrupted operationsand the gains and losses of subsidiaries.
Key points to remember
- The operating profit before depreciation and amortization (OIBDA) shows the profitability of a company in its main activities.
- OIBDA excludes the effects of capital expenditures on fixed assets, such as equipment.
- OIBDA also excludes interest expense or cost of debt and tax expense.
- Analysis of a company’s OIBDA shows how well a company generates revenue while managing its production and operating expenses.
Understanding operating profit before depreciation and amortization (OIBDA)
Operating income before depreciation and amortization (OIBDA) attempts to show how much income a company earns for its main activity. By analyzing a company’s OIBDA, we can see how much a company generates revenue sales while managing its production and exploitation charges.
OIBDA is a non-GAAP financial measurement, which means that it is not a regulatory requirement when companies declare their financial state. Regulatory bodies, such as the Securities and Exchange Commission (SEC)require companies to report their financial performance in a standardized format to help investors and creditors compare companies more effectively.
However, the OIBDA is still a useful metric because it can help investors understand the extent to which a company generates revenue from its primary production and manufacturing activities. Below are the components often used in the calculation of OIBDA.
Operating result
Operating income is the income that a company derives from its core business. Operating profit is the result of subtracting operating expenses gross profit.
Gross profit is a company’s revenue minus its cost of goods sold (COGS). Cost of goods sold represents the cost of inventory and supplies needed to produce the goods sold that generate revenue.
While gross profit shows the profit that a company makes from its production chain, operating profit is more inclusive. Operating profit includes operating expenses for running the business in addition to COGS.
Depreciation and amortization
When companies buy an asset such as a piece of machinery, it can be quite expensive. The cost of the asset can be used to reduce a company’s taxable income. In other words, net revenue is reduced by the cost of the asset for tax purposes, thereby reducing the taxes paid on the company’s profits.
Instead of reporting the full cost of the asset in the year it was purchased, companies are allowed to allocate the cost of that asset each year over the estimate useful life of the asset. This process of charging the asset over the years is called depreciation and is useful because it allows businesses to profit from the asset while only spending a portion of it each year.
Amortization is the same practice as depreciation, except that depreciation is used to intangible assets like a patent, while amortization is used to fixed assets such as machinery. When calculating OIBDA, depreciation is added back to operating profit, as it is usually subtracted from gross profit to arrive at operating profit.
Interest and taxes
Interest and taxes are expense items found on the income statement. Many businesses that purchase capital assets, such as a building, must borrow money to finance the purchase.
Consequently, the company must pay a interest charges each accounting period, which represents the interest rate applied to the debt by the lender. Taxes are also listed on a separate line of the income statement showing the tax expense that the company has paid according to the applicable tax rate and the profits generated.
Interest and taxes are generally listed after operating profit, which means they are not included in operating expenses. Therefore, these two expenses would normally not be included in the OIBDA calculation.
However, some companies report higher interest and tax expense in the income statement and are reflected in operating profit and therefore must be added back to operating profit to arrive at OIBDA. .
OIBDA formula and calculation
The formula for calculating operating profit before depreciation and amortization (OIBDA) is presented below:
In the OIB
=
HELLO
+
D
+
A
+
Tax
+
Interest
where:
HELLO
=
Operating result
D
=
Depreciation
A
=
Amortization
\begin{aligned}&\text{OIBDA}=\text{OI}\ +\ \text{D}\ +\ \text{A}\ +\ \text{Tax}\ +\ \text{Interest}\ \&\textbf{where:}\\&\text{OI}=\text{Operating Income}\\&\text{D}=\text{Depreciation}\\&\text{A}=\text {Damping }\end{aligned}In the OIB=HELLO + D + A + Tax + Interestwhere:HELLO=Operating resultD=DepreciationA=Amortization
- Locate operating income on the income statement.
- Locate an expense item for depreciation and amortization and add that figure to operating income.
- If the deduction for interest and taxes was included in operating profit, it should be added back to operating profit. If expenses are listed after operating income, they should be excluded from the OIBDA calculation.
Please note that some companies may incorporate depreciation expense into their COGS or selling, general and administrative (SG&A) expenses. In other words, there may not be a separate item for depreciation. In this case, the company cash flow statement should be used to find the line item. When calculating cash flowcompanies should add non-cash expenses, such as D&A, to net income to get the cash flow for the period.
OIBDA vs. EBITDA
OIBDA and EBITDA or earnings before interest, taxes, depreciation and amortization are similar but use different income figures as starting points.
The calculation of OIBDA starts with operating profit, while EBITDA starts with net profit, which represents profit for the accounting period. Unlike EBITDA, OIBDA does not include non-operating result or one-time charges. One-time items are ultimately added to or deducted from a company’s profit or revenue, but are not included in OIBDA.
This can be considered an advantage for comparison purposes since non-operating income generally does not repeat itself year after year. Its separation from operating income ensures that the calculation only reflects revenues from core activities.
Example of OIBDA
Below is Walmart Inc.’s income statement for the company’s fiscal year ending January 31, 2021, via the company’s 10-K report issued March 19, 2021.
OIBDA for 2021
- Operating profit was $22.548 billion for 2021.
- Interest and the provision for income taxes are listed under operating profit, which means that they are not reflected in operating profit and may be excluded from the OIBDA calculation.
- However, depreciation and amortization are not listed as a single line item in the income statement, which means they are integrated into the Costs and Expenses section.
Therefore, we have to refer to Walmart’s cash flow statement for the same period, which is shown below:
- Depreciation is listed under Cash flow from operating activities, totaling $11.152 billion for 2021.
- Walmart’s OIBDA for 2021 was $33.70 billion, calculated as $22.548 + $11.152 billion.
OIBDA for 2020 and 2019
Walmart’s OIBDA can also be calculated for 2020 and 2019 to compare with OIBDA of 2021 to get a better idea of whether 2021 was a good year or not.
- The 2020 OIBDA was $31.55 billion; since 2020, operating revenue was $20,568 and D&A was $10,987 ($20,568 + $10,987).
- The 2019 OIBDA was $32.635 billion; since 2019, operating income was $21,957 and D&A was $10,678 ($21,957 + $10,678).
Walmart’s 2021 OIBDA of $33.70 billion was more than $2 billion higher than 2020. However, the 2021 OIBDA was about $1 billion higher than 2019.
We can see that Walmart is increasing its revenue from its core business activities as the OIBDA in 2021 was much better than in 2020 and also beat the OIBDA of 2019.
However, the 2021 OIBDA was nearly $1 billion higher than 2019, in part due to a higher amortization expense for 2021 of $11.152 billion versus $10.678. Perhaps the company purchased new assets in 2021, which resulted in a higher depreciation expense.
When comparing OIBDA for different companies, it is important to consider whether the two companies belong to the same industry and have a similar need for fixed assets. If one company doesn’t have a lot of fixed assets while the other does, the depreciation expense and OIBDA of the two companies can be very different.