What is operating profit before depreciation and amortization (OIBDA)?
Operating profit before depreciation and amortization (OIBDA) is a measure of financial performance used by companies to show the profitability of their core businesses. OIBDA excludes the effects of capital expenditures on fixed assets, such as equipment, and interest expense associated with carrying debt.
Sometimes, OIBDA may not include changes in accounting principles that are not indicative of basic operating results, results from discontinued operations and profits and losses of subsidiaries.
Key points to remember
- 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.
- The OIBDA also excludes interest expense or cost of debt and tax charges.
- 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 profit before depreciation and amortization (OIBDA) attempts to show the income that a business earns for its core business. By analyzing a company’s OIBDA, we can see to what extent a company is generating revenue from sales while managing its production and operating expenses.
OIBDA is a non-GAAP financial measure, which means that it is not a regulatory requirement when companies publish their financial statements. Regulators, 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, OIBDA remains a useful metric because it can help investors understand the extent to which a business is generating income from its core production and manufacturing activities. Below are the components that are often used in the calculation of OIBDA.
Operating profit is the income that a business earns from its core business. Operating profit is the result of subtracting operating expenses from 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 income.
While gross margin indicates how much profit a company makes from its production line, operating profit is more inclusive. Operating income includes operating expenses related to running the business in addition to COGS.
Depreciation and amortization
When companies buy an asset like a machine, it can get very expensive. The cost of the asset can be used to reduce the taxable income of a business. In other words, net income is reduced by the cost of the asset for tax purposes, thus decreasing the taxes paid on the company’s profits.
Instead of reporting the total cost of the asset in the year it was purchased, companies are allowed to allocate the cost of that asset each year over the estimated useful life of the asset. This process of expensing the asset over the years is called depreciation and is useful because it allows businesses to earn a profit from the asset while expensing only a portion of it each year.
Depreciation is the same practice as depreciation, except that depreciation is used for intangible assets such as a patent, while depreciation is used for tangible assets such as machinery. When calculating OIBDA, depreciation and amortization are added to operating profit, as they are usually subtracted from gross margin to get operating profit.
Interest and taxes
Interest and taxes are expenditure items appearing on the income statement. Many businesses that buy capital assets, such as real estate, have to borrow money to finance the purchase.
As a result, the business must pay an interest charge each fiscal year, which represents the interest rate applied to the debt by the lender. Taxes are also listed on a separate line in the income statement indicating the tax charge that the company has paid on the basis of the applicable tax rate and the profit generated.
Interest and taxes are usually shown after operating profit, which means they are not included in operating expenses. Therefore, these two expenses would not normally be included in the calculation of OIBDA.
However, some companies report higher interest and tax charges in the income statement and are reflected in the operating result and therefore have to be reintegrated into the operating result to arrive at the OIBDA.
Formula and calculation of OIBDA
The formula for calculating operating profit before depreciation (OIBDA) is presented below:
OIBDA=OI + D + A + Tax + Interestor:OI=Operating resultD=DepreciationA=Amortization
- Locate the operating result on the income statement.
- Find an expense item for depreciation and amortization and add that number to the operating profit.
- If the deduction for interest and taxes has been included in the operating result, it must be reintegrated into the operating result. If the expenses are entered after the operating result, they must be excluded from the calculation of the OIBDA.
Please note that some companies may incorporate depreciation charges into their COGS or Selling, General and Administrative (SG&A) expense. In other words, there may not be a separate item for depreciation and amortization. In this case, the company cash flow statement should be used to find the position. When calculating cash flow, businesses should add non-cash expenses, such as amortization and depreciation charges, to net income to get 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 the starting points.
The calculation of OIBDA begins with operating profit, while EBITDA begins with net profit, which represents the profit for the accounting period. Unlike EBITDA, OIBDA does not include non-operating income or non-recurring charges. One-off items are ultimately added to or subtracted from the profits or profits of a business, but are not included in the OIBDA.
This can be seen as a benefit for comparison purposes since non-operating income generally does not recur from year to year. Its separation from operating profit ensures that the calculation only reflects the result of the main activities.
Below is Walmart Inc.’s income statement for the company’s fiscal year ending January 31, 2021, via the company’s 10-K report released on March 19, 2021.
OIBDA for 2021
- Operating income was $ 22.548 billion for 2021.
- Interest and the provision for income taxes are shown under operating profit, which means that they are not reflected in operating profit and can be excluded from the calculation of OIBDA.
- However, depreciation and amortization are not listed as a single item in the income statement, which means they are included in the Costs and expenses section.
Accordingly, we have to refer to Walmart’s cash flow statement for the same period, which is shown below:
- Depreciation is listed in cash flow from operating activities for a total of $ 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 be compared to the 2021 OIBDA to better understand whether 2021 has been a good year or not.
- The OIBDA 2020 was $ 31.55 billion; as of 2020, operating revenue was $ 20,568 and D&A was $ 10,987 ($ 20,568 + $ 10,987).
- The 2019 OIBDA was $ 32.635 billion; as of 2019, operating revenue was $ 21.957 and depreciation expense was $ 10.678 ($ 21.957 + $ 10.678).
Walmart’s 2021 OIBDA of $ 33.70 billion was over $ 2 billion higher than 2020. However, 2021’s OIBDA was about $ 1 billion higher than in 2019.
We can see that Walmart is increasing its revenue from its core business since 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 depreciation charge for 2021 of $ 11.152 billion compared to $ 10.678. Perhaps the company bought new assets in 2021, which resulted in a higher depreciation charge.
When comparing OIBDA for different companies, it is important to determine whether the two companies belong to the same industry and have a similar capital requirement. If one company does not have a lot of fixed assets while the other does, the depreciation expense and OIBDA for the two companies can be very different.