OIBDA vs EBITDA: How They Differ and When to Use Each

At first glance, OIBDA and EBITDA appear to be similar since both are used for assessing operating performance and profitability and in each case depreciation and amortization are excluded. Nevertheless, each of the metrics looks at operating results in a slightly different way.

When you are using these metrics for management reporting, financial planning, forecasting or for comparing companies, keep this difference in mind. It is helpful to know what is included in each figure and what it shows about the business.

Read: A Complete Guide to Financial Statement Analysis for Strategy Makers

The article looks at the differences between OIBDA and EBITDA, compares the two formulas and shows when it is appropriate to use each one, and also explains how to apply them in financial planning and forecasting.

OIBDA stands for operating income before depreciation and amortization. It shows the profit from the primary business activity after calculating operating income but before deducting depreciation and amortization.

The formula is:

OIBDA = Operating Income + Depreciation + Amortization

The key thing is that OIBDA begins with operating income and is concerned with the operating portion of the profit and loss statement; revenue, material costs, payroll, logistics, utilities, and other operating expenses have an impact on OIBDA, whereas financing and other non-operating items do not.

This approach is useful for companies which have a large number of assets. For instance, a manufacturer could make heavy investments in production lines, warehouses, or machinery. Such investments are then covered by depreciation expenses. When you add the depreciation back, you obtain an alternative indication of the main business’s performance.

OIBDA can also be used to examine profitability for various business units, plants, products, or different time periods, since changes in price, volume, material costs, production costs, or staffing all have an effect on OIBDA and thus enable you to see the impact of these changes.

EBITDA stands for earnings before interest, taxes, depreciation, and amortization and it means the amount earned by a company before the deductions for financing, taxes, depreciation, and amortization.

One way to calculate it is:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

The U.S. Securities and Exchange Commission (SEC) states that when the term “earning EBITDA” is used in relation to EBITDA it refers to net income as determined in accordance with GAAP; consequently, any measures that are termed differently must have their own name, for example, “Adjusted EBITDA”.

In management reports EBITDA is usually taken as a key indicator of profitability since it can be compared with budgets and forecasts, the EBITDA margin can be looked at and the reasons for any differences can be discovered.

EBITDA is also used outside of internal planning. It appears in company valuations, mergers and acquisitions analysis, financing, and when comparing companies.

The main difference between OIBDA and EBITDA is the starting point and which earnings are included in each calculation.

OIBDA begins with operating income and then adds back the figures for depreciation and amortization so as to focus on the core business operations.

By the definition of the SEC, EBITDA starts from net income and then adds back the figures for interest, taxes, depreciation, and amortization.

Here is the basic comparison:

OIBDA and EBITDA may in fact be identical, but differences between the two figures can occur because of non-operating income and expenses.

Which is why you should look into the method used to calculate each KPI when you are comparing companies or different time periods, since the final figure shows only part of the story.

Consider a manufacturing company with the following annual results:

First, calculate OIBDA:

OIBDA = €30M + €12M + €3M = €45M

Now calculate EBITDA:

EBITDA = €20M + €5M + €5M + €12M + €3M = €45M

In this case, both figures are €45 million since there are no additional non-operating items between operating income and income before tax.

The method you use to calculate each metric is still important; OIBDA begins with operating income whereas EBITDA begins with net income as defined by the SEC.

Actual company reports illustrate the importance of definitions. For instance, AT&T defines OIBDA in its filings with the SEC as operating income before depreciation and amortization; the company also mentions that its method of calculating OIBDA may differ from similar measures used by other companies.

When you are comparing these metrics, make sure to check both the reported value and the calculation method.

OIBDA is useful if you are interested in looking at core operating performance before allowing for depreciation and amortization.

This point is particularly important in industries that have a lot of assets such as manufacturing and telecommunications, since the equipment, facilities, and network infrastructure present can result in substantial depreciation expenses.

OIBDA also supports internal analysis, when looking at individual plants, products, business units, or markets and allows you to associate changes in OIBDA with operating factors such as sales volume, prices, gross margin, material costs, and payroll.

Since OIBDA is a non-GAAP figure, companies may calculate it differently. It is essential to have a clear and consistent definition when comparing one period with another or when comparing companies.

EBITDA is used in a number of areas. It is relied upon for management reports, budgets, forecasts, valuations, and when analysing mergers and acquisitions, as well as for financing.

Another useful KPI is EBITDA margin:

EBITDA margin = EBITDA ÷ Revenue × 100

The EBITDA margin represents the amount of EBITDA that a business makes for each euro of revenue and can be used to explain instances in which revenue and profitability do not change in tandem.

EBITDA is employed in valuation multiples, for instance McKinsey looks at enterprise-value multiples such as EV/EBITDA and emphasizes the need to select the appropriate comparable companies when using them.

EBITDA is useful as a performance indicator when it comes to preparing plans, whether for actual figures, budgets, forecasts or different scenarios.

OIBDA and EBITDA are most helpful when you link them to the operational factors that drive the financial plan.

Instead of giving a single figure for EBITDA, construct it by making assumptions regarding sales volume, prices, margins, material costs, staffing, and other operating expenses.

For instance, if the most recent forecast indicates that EBITDA is €4 million below budget, variance analysis would show that the reduced sales volume accounts for €1.5 million, higher material prices account for €2 million, and the lower personnel costs offset €500,000.

In this way, you will be able to see exactly what caused the €4 million gap.

The same method can be applied to scenario planning. For example, you could examine the effect on EBITDA and EBITDA margin of a 5 per cent increase in the price of raw materials or a 3 per cent decrease in sales volume.

The same applies to OIBDA, when one is concerned solely with operating performance.

Most important of all is to apply the same method of calculation to the actual figures, the budgets, the forecasts, and the scenarios. This in turn enables you to identify the main business drivers responsible for changes in profitability.

The budgeting and forecasting software offered by Farseer employs driver-based models in order to connect operational assumptions with financial outcomes. Teams can change the drivers, compare different scenarios, and observe the effect that these changes have on the financial model.

Apply the same formula to your actuals, budgets, forecasts, and management reports, this is particularly important when consolidated reporting includes multiple entities or business units.

It is important as well when you are comparing companies to look at the way each one defines and reconciles its non-GAAP figures before drawing any comparisons.

EBITDA is a measure of profitability and not one of cash generation; cash flow is also influenced by working capital, capital expenditures, interest payments, and taxes.

When preparing a plan, you should use EBITDA along with cash flow and working capital key performance indicators in order to assess both profitability and liquidity.

Apart from interest, taxes, depreciation, and amortization, adjusted EBITDA might also exclude other items. Therefore, it is important to keep EBITDA and adjusted EBITDA clearly distinct.

Make a record of each adjustment and apply the same method over all the reporting periods. This ensures that you have a consistent approach for comparing actual performance with budgets and forecasts.

OIBDA and EBITDA provide contrasting views of a company’s profitability since OIBDA looks at operating income before allowing for depreciation and amortization, whereas EBITDA is more commonly used in financial planning, reporting, valuation, mergers and acquisitions, and financing.

When it comes to planning and performance management, it is essential to maintain consistency. The KPI should be clearly defined, the same method of calculation must be applied to the actual figures, the budget and the forecasts, and the results should be linked to the main business drivers.

With Farseer, you can build EBITDA and other profitability KPIs directly from the operational drivers behind your financial plan. The same calculation logic can flow through actuals, budgets, forecasts, and scenarios, while changes in sales, prices, material costs, headcount, and other drivers feed into the financial model.

This makes it easier to explain why profitability changed, test the impact of new assumptions, and update the forecast without rebuilding calculations across separate spreadsheets.