What is OIBDA?
OIBDA is operating income before depreciation and amortization. It is calculated by adding back depreciation and amortization to operating income (excluding non recurring items). This is not generally reported by companies in their fillings as it is a non-GAAP measure.
- Operating Income before Depreciation and Amortization is used by the companies to give a clearer picture of the profitability in continuing business activities without taking into consideration the effects of capitalization and tax structure.
- Operating Income before Depreciation and Amortization acts as the proxy for cash generated irrespective of its capital structure and taxes and excludes non-operating expenses like tax deductions, long-term capital investmentsCapital InvestmentsCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc. in equipment, and intangible assets like the trademark.
Calculate OIBDA – Colgate Example
Let us now calculate the OIBDA of Colgate. Below is the snapshot of Colgate’s Income Statement –
source: Colgate SEC Filings
Below are the steps for calculation of OIBDA –
- Find the Operating Profit as per the Income Statement
Operating Profit as per the Income Statement is as per below
Operating Profit (2017) = $3,589 million
Operating Profit (2016) = $3,837 million
Operating Profit (2015) = $2,789 million
- Find the Non-Recurring Charges included in the Income Statement
The income statement of Colgate contains two types of non-recurring itemsTypes Of Non-recurring ItemsNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off.
– Charge for Venezuela accounting change is a non-recurring item.
– Other expenseOther ExpenseOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities. also contains some of the non-recurring charges
source: Colgate SEC Filings
In the above table, only the amortization of intangible assetsAmortization Of Intangible AssetsAmortization of Intangible Assets refers to the method by which the cost of the company's various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset. is a recurring charge. All others included in the table are non-recurring in nature.
Non Recurring Charges (2017) = $169 – $11 + $1 = $159 million
Non Recurring Charges (2016) = $105 – $97 + $17 – $10 – $11 = $4 million
Non Recurring Charges (2015) = $1084 (venezuela charges) + $170 + $14 + $34 – $187 – $8 + $6 = $1113 million
- Find Operating Profit (excluding the non recurring charges)
Operating Profit, excluding non recurring charges (2017) = $3,589 + $159 = $3,748 million
Operating Profit, excluding non recurring charges(2016) = $3,837 + $4 = $3,841 million
Operating Profit,excluding non recurring charges (2015) = $2,789 + $1,113 = $3,902 million
- Find Depreciation and Amortization
source: Colgate SEC Filings
From the cash flow statementsCash Flow StatementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business., we have the following
Depreciation and Amortization (2017) = $475 million
Depreciation and Amortization (2016) = $443 million
Depreciation and Amortization (2016) = $449 million
- Calculate OIBDA using the Formula
OIBDA Formula = Operating Income (net of non recurring items) + Depreciation + Amortization
OIBDA (2017) = $3,748 + $475 = $4223 million
OIBDA (2016) = $3,841 + $443 = $4223 million
OIBDA (2015) = $3,902 + $449 = $4,351 million
OIBDA vs EBITDA – Colgate Example
Though OIBDA vs. EBITDA are similar in many ways, during the calculation, they will differ by other non-operating expensesOther Non-operating ExpensesNon operating expenses are those payments which have no relation with the principal business activities. These are the non-recurring items that appear in the company's income statement, along with the regular business expenses.. In the absence of non-operating and non-financial income and expenses, both OIBDA vs. EBITDA will be the same.
Please see below the calculation of EBITDA of Colgate for 2015, 2016, and 2017.
Now see the calculation of OIBDA that excludes all the nonrecurring items.
In most cases, non-operating income and expenses are non-recurring in nature, and it is absolutely normal to not include those in financial calculations done by Financial Analysts. So OIBDA is more accurate than EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors..
Operating Income before Depreciation and Amortization Explained in Detail
- Operating Income before Depreciation and Amortization is gaining popularity as companies are not very much interested in using earnings before interest, taxes, depreciation, and amortization (EBITDA).
- Operating Income before Depreciation and Amortization does not take into account the non-operating income, which is an advantage because non-operating income usually does not happen year after year, and its marking clearly makes sure that all the income reflects only the income from regular operations.
- Since all valuation methods start with DCFDCFDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company's future performance., Operating Income before Depreciation and Amortization is an important part of the detailed financial analysis. A close eye is kept on the changes and patterns in this metric, as that can be a signal of changes in core operations.
- The depreciation and amortization are added to the operating income since depreciation and amortization are typically included as operating expenses.
- Operating Income before Depreciation and Amortization measures income exclusive of the effects of a company’s capital spending choices. It also does not show the cash used for debt services, distributions, or other operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit. that are non-core. With the help of Operating Income before Depreciation and Amortization, the investors get a better understanding of the efficiency of a company’s operations.
Advantages of OIBDA
- Operating Income before Depreciation and Amortization figures are generally higher and, in some cases, significantly higher than the earnings figure calculated by any other accounting methodAccounting MethodAccounting methods define the set of rules and procedure that an organization must adhere to while recording the business revenue and expenditure. Cash accounting and accrual accounting are the two significant accounting methods..
- Operating Income before DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. and Amortization takes into account all the operating expenses that are part of daily operations, as the salary of employees, raw material costs, employee benefits, and pension contributions, and shipping fees. The OIBDA calculation disregards non-operating expenses like tax deductions, long-term capital investments in equipment, and intangible assetsIntangible AssetsIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. like the trademark.
- Operating Income before Depreciation and Amortization gives a high earnings figure, which is desirable for the stockholdersThe StockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares. and investors.
- By reporting earnings with Operating Income before Depreciation and Amortization for the business entity does not have to take into consideration non-operating expenditures like a long-term investment in equipment, tax deductions, and investments in intangible assets.
Disadvantages of OIBDA
- Calculations are quite complex.
- Since it is a non-GAAP method, it means non- standard earnings calculations are done, which may get creative at times, and distinctions between expenses can get blurred like the distinction between extraordinary expense and recurring expense.
- Since Operating Income before Depreciation and Amortization is a non-GAAP method, there are no specific standards regarding what to include in its calculation. So multiple earnings calculation methods should be used instead.
Video on OIBDA
Operating Income before Depreciation and Amortization is an important measure to gauge cash generated by a firm irrespective of taxes and capital structure. That’s why it can be used as a tool to design mergers and acquisitions and restructuring. This measure can be used effectively to calculate a company’s total enterprise valueTotal Enterprise ValueEnterprise Value is a measure of a company's total value that spans the entire market rather than just the equity value. It includes all debt and equity-based ownership claims. This value, which is calculated as the market value of debt + market value of equity - cash and cash equivalents, is particularly relevant when valuing a takeover.. If a company wants to please its stockholders, then the higher value of Operating Income before Depreciation and Amortization is very important.
This has been a guide to what is OIBDA, its formula, and calculation. Here we discuss the Colgate OIBDA example and also highlight the differences between OBIDA vs. EBITDA. You may learn more about ratio analysis from the following articles –