OIBDA

OIBDA is operating income before depreciation and amortization. It is calculated by adding depreciation and amortization to operating income (excluding non-recurring items). Companies in their fillings do not generally report it as it is a non-GAAP measure.

•  The companies use operating Income before Depreciation and Amortization to give a clearer picture of the profitability in continuing business activities without considering 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.

• OIBDA, or Operating Income Before Depreciation and Amortization, is a non-GAAP measure used to calculate operating income by adding depreciation and amortization back to it, excluding non-recurring items. Companies often don't report it in their financial filings.
• OIBDA is a substitute for cash a company generates, irrespective of its capital structure and taxes. It omits non-operating expenses like tax deductions and long-term capital investments in equipment and intangible assets, such as trademarks.
• A higher OIBDA is significant for a company seeking to impress its stockholders, as it indicates strong operating performance without the impact of certain non-operating factors.

Let us now calculate the OIBDA of Colgate. Below is the snapshot of Colgate's Income Statement -

source: Colgate SEC Filings

Though OIBDA vs. EBITDA is similar in many ways, they will differ by other non-operating expenses, during the calculation. 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, and it is normal not to include those in financial calculations done by Financial Analysts. So OIBDA is more accurate than EBITDA.

• Operating Income before Depreciation and Amortization is gaining popularity as companies are not interested in using earnings before interest, taxes, depreciation, and amortization (EBITDA).
• Operating Income before Depreciation and Amortization does not consider the non-operating income, which is an advantage because non-operating income usually does not happen year after year. Its marking makes sure that all the income reflects only the income from regular operations.
• Since all valuation methods start with 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.
• 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 expenses 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.

• 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 considers all the operating expenses that are parts of daily operations, such as the salary of employees, raw material costs, employee benefits, 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 consider non-operating expenditures like a long-term investment in equipment, tax deductions, and investments in intangible assets.

• Calculations are quite complex.
• Since it is a non-GAAP method, non-standard earnings calculations are done, which may get creative at times. Distinctions between expenses can get blurred, like extraordinary and recurring expenses.
• 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 mergers 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 OIBDA, its formula, and its calculation. Here we discuss the Colgate OIBDA example and highlight the differences between OBIDA and EBITDA. You may learn more about ratio analysis from the following articles –

• EBITDAR
• EBIT vs. EBITDA - Differences
• EBITDA vs. Operating Income
• What is Quality of Earnings?