OIBDA

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Last Updated:November 23, 2023

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What Is Operating Income Before Depreciation and Amortization (OIBDA)?

OIBDA is an acronym that stands for Operating Income Before Depreciation and Amortization. It shows the profitability of the core business activities of the company.

It is not a GAAP measure. GAAP stands for Generally Accepted Accounting Principles. These principles consist of accounting rules and standards that need to be followed for financial reporting by American public companies.

A publicly listed company must prepare its financial reports after every quarter and fiscal year.

Although not a formal measure, OIBDA matters to investors as they use it to measure the company's earnings from its core business activities.

What are core business activities? Consider a huge wholesaler. While the firm might invest in securities or sell stock to secure financing, that is not its main business activity.

Their main business activities would be buying and selling in bulk. Therefore, any profit from product sales would constitute earnings from its main business activity.

Companies also use it to give a clear picture of the profitability of business activities without considering the tax structure.

Dividends are rewards or cash from the company’s profit to investors and shareholders. These dividends are paid either monthly or annually.

Key Takeaways

Operating income before depreciation and amortization (OIBDA) is a non-GAAP metric used to assess a company's core business profitability.
It focuses on core business activities, excluding non-operating incoming and expenses and providing insights into a company's day-to-day operational results.
Although it is not a GAAP measure, investors use OIBDA to gauge a company's earnings from core business activities, avoiding complications introduced by tax structures.
OIBDA focuses solely on operating expenses, such as salaries and property taxes, excluding non-operating expenses. This emphasis can attract more investors, portraying higher earnings.
However, the use of varied accounting methods and the inclusion of non-cash expenses like depreciation impact the accuracy of cash transactions, deviating significantly from GAAP standards.

Why does OIBDA matter?

OIBDA matters to investors as they use this as a measure to compute the company's earnings from the core business activities.

The metrics companies use to assemble their financial reports are OIBDA and earnings before interest, taxes, depreciation, and amortization (EBITDA).

Choosing this financial metric over EBITDA matters because it focuses only on expenses directly incurred in a company’s day-to-day activities. This allows focus on revenue generated from the primary activities of the company.

It does not focus on non-operating expenses and only shows actual operating results. This is also one of the reasons why it is not a GAAP measure.

Another reason it is preferred over EBITDA is that it considers the expenses incurred in the company from the core business activities. On the other hand, it does not. This leads to higher earnings and more succeeding investors and shareholders.

Advantages and disadvantages Of OIBDA

Some of the advantages are:

It focuses on only operating expenses such as salary, property taxes, office supplies, and depreciation.
It does not focus on non-operating expenses such as interest payment, write-down of assets, and long-term capital investments in equipment. This leads to higher earnings throughout the company and attracts more potential investors.
The usual net income computation includes all costs, including corporate tax deductions that significantly reduce a company's taxable earnings. In contrast, OIBDA excludes all deductions and expenses, reporting only those that directly relate to the firm's daily operation (Roos, 2022).

One disadvantage is:

Different accounting methods are used to calculate the company's earnings as it does not follow GAAP. In addition, it does not follow a set of standards while calculating earnings.

OIBDA vs. EBITDA

The main differences between OIBDA and EBITDA are:

It is an acronym that stands for operating income before depreciation and amortization.
It shows the profitability of the core business activities of the company.
It begins with using operating income as the starting point, where:

Operating income = Net earnings + interest earnings + taxes

It only focuses on operating expenses and does not focus on non-operating expenses.
It does not focus on non-operating income.
A one-time item on the income statement is a nonrecurring gain, loss, or cost that is not part of a company's ongoing business operations (Item, 2022). For example, costs related to construction and revenue generated from selling a building.
It does not focus on one-time items.

EBITDA

EBITDA is an acronym that stands for earnings before interest, taxes, depreciation, and amortization.
It begins with using net income as the starting point, where:

Net income = Gross profit – operating expenses – taxes – interest on debt + other income

It focuses on both operating and non-operating expenses.
It also focuses on non-operating income, such as gains and losses on foreign exchange transactions, dividend income, and gains and losses on investments.
It focuses on one–time items or non-operating incomes.

Components Of OIBDA

The components of OIBDA are:

Operating income

Operating income, also called operating profit or earnings before interest and taxes (EBIT)
Only operational expenditures incurred by a firm during normal business operations are removed from gross profit to calculate operating profit (Jayathilaka, 2020).
Operating income is computed by deducting from the gross profit the operating costs incurred in the company's daily operations.
Gross profit is calculated by subtracting the cost of goods sold (COGS) from the company’s revenue.
Cost of goods sold (COGS) includes direct material, direct labor, fixed manufacturing overhead, and variable manufacturing overhead.

Depreciation and amortization

Depreciation is the reduction in the value of tangible assets, such as land, PPE, and vehicles. Amortization is the decrease in the value of intangible assets, such as goodwill, patents, and copyright.

1. Depreciation

Depreciation is the decrease in the value of a fixed asset over a period.
When an asset is used for a couple of years, taxes tend to build up and are subtracted from the net income.
Depreciation can allow companies to profit while only expanding a small asset value rather than a huge amount that will impact the net income.
It included four calculation methods: the straight-line method, the declining balance method, the sum-of-the-years digit method, and the units of production method.
It is used for tangible objects. These objects have a physical state, such as property, plant, and equipment (PPE).

2. Amortization

Amortization is like depreciation, but the only difference is that it is used for intangible objects. These objects, such as patents, trademarks, and copyrights, do not have a physical state.
A common point between depreciation and amortization is that they both are non-cash expenses.
A non-cash expense is an operational expense that does not involve a monetary outlay (Forsythe, 2022).

3. Interest and taxes

Interest and taxes are expenses that are included in the income statement.
Interest expenses should be paid in each accounting period, and the lender decides the interest rate.
These expenses are not included as operating expenses as they are not incurred in the company’s day-to-day activities.
They are only included after computing operating income.

Calculating Operating Income Before Depreciation and Amortization (OIBDA)

OIBDA can be calculated using the formula shown below:

Operating income + Depreciation + Amortization + Tax + Interest

The first step is to calculate operating income. This can be computed in the income statement. Operating income can be calculated by subtracting operating expenses that are incurred in the company’s day-to-day activities from gross profit.

Gross Profit = Revenue - Cost Of Goods Sold

Operating Income = Gross profit - Operating Expenses

The second step is to find and add the total depreciation and amortization to the operating income.

The third step is adding back interest and taxes to compute the formula. If interest and taxes have been subtracted to compute operating income, they should be added to the formula.

The fourth step includes adding steps one, two, and three to calculate the formula.

Depreciation and amortization can also be found in the cash flow statement if they are not in a separate line in the income statement, as depreciation and amortization are non-cash expenses, which means that they do not require actual cash transactions.

Examples Of OIBDA

Some of the examples are:

Example 1:

The following information is required to compute Operating Profit Before Depreciation and Amortization

Operating income = $40,000
Depreciation = $5,000
Amortization = $2,000
Interest = $3,000
Tax = $1,500

Interest and taxes have been added after the calculation of operating income.

OIBDA = Operating income + depreciation + amortization + interest + taxes

= $40,000 + $5,000 + $2,000 + $3,000 + $1,500

= $51,500

If interest and taxes have been subtracted to compute operating income, they should be added to the formula.

Analysts can exclude the values of depreciation and amortization to compute the value of the company's core activities.

Example 2:

Operating income = $35,000
Depreciation = $4,000
Amortization = $3,000
Interest = $3,000
Tax = $2,000

Interest and taxes have been added to calculate the operating income.

OIBDA = Operating income + depreciation + amortization

= $35,000 + $4,000 + $3,000

= $42,000

So, in this case, interest and taxes will not be added to the formula since the interest and taxes have been added before the operating income.

Operating Income Before Depreciation And Amortization (OIBDA) FAQs

Are OIBDA and EBITDA the same?

They are similar but use different incomes. OIBDA uses operating income as the starting value, and EBITDA uses net income as its starting value.

Some other differences are that the first does not include non-operating incomes such as gains and losses on investments and impairment losses on assets. At the same time, EBITDA does include non-operating incomes.

Is operating profit the same as EBIT?

Yes, operating profit and Earnings Before Interest and Taxes (EBIT) are the same. Its alternate name is EBIT. Operating profit does not take interest and tax into consideration.

What Is The Difference Between Operating Income And Net Income?

Operating income subtracts operating expenses from the total value, whereas net income subtracts non-operating expenses from the total value.

Operating expenses include rent, salaries, and depreciation. Non-operating expenses include inventory write-offs, dislocation of business, and acquiring another firm.