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

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

Let me explain what operating income before depreciation and amortization, or OIBDA, really is. It's a financial performance measure that companies use to highlight profitability from their core business activities. OIBDA strips out the impacts of capital spending on fixed assets like equipment, as well as the interest expenses from debt.

In some cases, OIBDA also leaves out changes in accounting principles that don't reflect core operations, income from discontinued operations, and earnings or losses from subsidiaries. You need to understand this to see how it focuses purely on operational results.

Key Takeaways on OIBDA

OIBDA directly shows you a company's profitability in its main business operations. It excludes the effects of spending on fixed assets, such as equipment. It also leaves out interest expenses from debt and tax costs. When you analyze OIBDA, you get a clear view of how well a company generates revenue while controlling production and operating expenses.

Understanding Operating Income Before Depreciation and Amortization (OIBDA)

OIBDA aims to reveal how much income a company earns from its core business. By looking at OIBDA, you can assess how effectively a company turns sales into revenue while managing production and operating costs.

Remember, OIBDA is a non-GAAP measure, so it's not required in financial reporting. Agencies like the SEC require standardized formats for comparing companies, but OIBDA still helps you understand income generation from core production and manufacturing.

Here are the key components for calculating OIBDA, which I'll break down next.

Operating Income

Operating income is what a company earns from its core business after subtracting operating expenses from gross profit. Gross profit comes from revenue minus the cost of goods sold, which covers inventory and supplies for producing revenue-generating goods.

While gross profit focuses on production-line profits, operating income includes all operating expenses for running the company, plus COGS.

Depreciation and Amortization

When a company buys an expensive asset like machinery, it can deduct that cost from taxable income over time. Instead of expensing the whole cost in the purchase year, companies spread it over the asset's useful life through depreciation, allowing them to profit from the asset while expensing portions annually.

Amortization works the same way but for intangible assets like patents, while depreciation is for tangible ones like machinery. In OIBDA, you add back depreciation and amortization to operating income since they're subtracted to reach operating income from gross profit.

Interest and Taxes

Interest and taxes appear as expenses on the income statement. Companies often borrow for fixed assets like buildings, leading to periodic interest expenses based on the lender's rate.

Taxes show the expense paid based on profit and applicable rates. These are usually after operating income, so they're not in operating expenses and typically excluded from OIBDA. But if they're included in operating income on some statements, add them back for OIBDA.

Formula and Calculation of OIBDA

The formula for OIBDA is straightforward: OIBDA = Operating Income + Depreciation + Amortization + Tax + Interest.

Start by finding operating income on the income statement. Add the depreciation and amortization expense to it. If interest and taxes are deducted in operating income, add them back; if they're listed after, exclude them.

Sometimes depreciation and amortization are buried in COGS or SG&A without a separate line. In that case, check the cash flow statement, where they're added back to net income for cash flow calculations.

OIBDA vs. EBITDA

OIBDA and EBITDA are similar but start from different points. OIBDA uses operating income, while EBITDA starts with net income, the period's profit.

Unlike EBITDA, OIBDA ignores non-operating income or one-time charges, which is useful for comparisons since those items don't recur. This keeps OIBDA focused on core operations.

Example of OIBDA

Take Walmart's income statement for the fiscal year ending January 31, 2021. Operating income was $22.548 billion. Interest and taxes are below it, so exclude them. Depreciation and amortization aren't separate, so look at the cash flow statement, where they total $11.152 billion.

Thus, 2021 OIBDA is $33.70 billion ($22.548 + $11.152). For comparison, 2020 OIBDA was $31.55 billion (operating income $20.568 + D&A $10.987), and 2019 was $32.635 billion (operating income $21.957 + D&A $10.678).

Walmart's 2021 OIBDA beat 2020 by over $2 billion and 2019 by about $1 billion, showing growth in core operations, partly due to higher depreciation from new assets.

When comparing OIBDA across companies, ensure they're in similar industries with comparable fixed asset needs, as differences in depreciation can skew the figures.