Financial Statement Analysis
- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity Risk
- Altman Z Score
- Turnover Ratios
- Profitability Ratios
- Profit Margin
- Gross Profit Margin Formula
- Operating Profit Margin Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- ROIC vs ROCE
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Capitalization Rate
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula
- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- Financial Leverage Ratio
- Net Debt Formula
- Leverage Ratios
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
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 investments in equipment and intangible assets like the trademark.
Calculate OIBDA – Colgate Example
Let us now calculate OIBDA of Colgate. Below is the snapshot of Colgate’s Income Statement –
source: Colgate SEC Filings
Step 1 – 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
Step 2 – Find the Non-Recurring Charges included in the Income Statement
Income statement of Colgate contains two types of non-recurring items
- Charge for Venezuela accounting change is a non-recurring item.
- Other expense also contains some of the non-recurring charges-
source: Colgate SEC Filings
In the above table, only amortization of intangible assets 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
Step 3 – 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
Step 4 – Find Depreciation and Amortization
source: Colgate SEC Filings
From the cash flow statements, we have the following
- Depreciation and Amortization (2017) = $475 million
- Depreciation and Amortization (2016) = $443 million
- Depreciation and Amortization (2016) = $449 million
Step 5 – 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 but during calculation, they will differ by other non-operating expenses. In 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 of the 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 EBITDA.
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 to use 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 discounted cash flows (DCF), 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 effects of a company’s capital spending choices. It also does not show the cash used for debt services, distributions or other operating expenses which 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 method.
- Operating Income before Depreciation and Amortization takes into account all the operating expenses that are part of daily operations, like 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 assets like the trademark.
- Operating Income before Depreciation and Amortization gives a high earnings figure which is desirable for the stockholders 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 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.
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 merger and acquisitions and restructuring. This measure can be used effectively to calculate a company’s total enterprise value. 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 Colgate OIBDA example and also highlight the differences between OBIDA vs EBITDA. You may learn more about ratio analysis from the following articles –