Question

Discuss the appropriate usage and justification of EBITDAR and gross margin particularly for retail companies

Answer 1

EBITDAR stands for earning before interest, tax, depreciation, amortization and restructuring or rent cost. Gross margin the difference between the revenue from sales and cost of goods sold. The EBITDAR margin is important from the perspective of retail companies because besides the cost of goods sold, one major cost of these companies is the warehouse or storage cost or we can say the rent of warehouse. This is actually a very important measure of performance which has to pay heavy rent like retail companies, airlines companies, Shipping companies. It computes the operating income of the organization before adjusting for these costs including rent. It also helps in understanding the business ability to generate profits even when there is huge cost in terms of paying rent or restricting cost. Gross margin is important to understand as to how much gross profit the company is able to make with every dollar of sales. If the company has high gross margin that means that even if the cost of raw material rises the company might be able to pass on the cost to the customer without significantly affecting the revenue level. The high gross margin also shows that company product has high demand in the market and there is less substitute for that product.