EV/EBITDAR: The Lease-Adjusted Multiple for Asset Lessees

Key Takeaways

• EV/EBITDAR equals enterprise value plus capitalized leases divided by EBITDA plus rent expense.
• The multiple lets you compare carriers that own aircraft to carriers that lease them on equal footing.
• IFRS 16 and ASC 842 moved operating leases onto the balance sheet, but residual treatment differences remain.
• Always add capitalized lease value to the numerator if you add rent back in the denominator.

What It Is

The EV/EBITDAR ratio is a lease-adjusted enterprise value multiple. EBITDAR is EBITDA with rent and lease expense added back. Enterprise value is grossed up to include capitalized lease obligations so that the numerator and denominator treat lease economics consistently.

Damodaran describes the broader treatment: an analyst capitalizes operating leases by computing the present value of future lease payments and adding it to debt for valuation purposes. EBITDAR pushes the same logic through the income statement, treating rent as a financing-equivalent expense rather than an operating cost.

The Intuition

Two airlines flying the same routes can show very different EBITDA margins if one owns its planes and the other leases them. The owner books depreciation, which is added back in EBITDA. The lessee books rent, which is not. The result is a comparison that flatters the owner without any underlying difference in profitability.

EBITDAR fixes this by also adding rent back. Once rent is in the same bucket as depreciation, the two airlines are evaluated on the cash they would generate before any financing decision about how to put metal in the air. The same logic applies to hotel operators that lease versus own properties, casino operators with ground leases, and large retail tenants.

How It Works

The formula is:

EV/EBITDAR = (EV + Capitalized Leases) / (EBITDA + Rent Expense)

EBITDAR is calculated as:

EBITDAR = Operating Income + D&A + Rent / Lease Expense

Capitalized leases can be taken from the balance sheet now that IFRS 16 and ASC 842 require operating lease right-of-use assets and lease liabilities to be reported. For pre-2019 comparisons, the present value of future lease payments was estimated using the firm's borrowing rate, typically 5% to 8%.

Some sources separate aircraft rent (added back to form EBITDAR) from other rent such as hangars and corporate offices (left in operating expenses). Be consistent across peers.

Worked Example

A regional airline has 100 million shares at $40, debt of $1,500 million, capitalized leases of $2,000 million, and cash of $300 million. Reported EBITDA is $400 million; aircraft rent is $250 million.

• Equity value = 100 x $40 = $4,000 million
• EV = 4,000 + 1,500 + 2,000 - 300 = $7,200 million
• EBITDAR = 400 + 250 = $650 million
• EV/EBITDAR = 7,200 / 650 = 11.1

A peer that owns its fleet would report higher EBITDA, lower rent, and higher capitalized debt. Their reported EV/EBITDA might look cheaper, but EV/EBITDAR puts both carriers on the same scale. If the peer trades at 8 EV/EBITDAR with similar load factors, the lessee at 11 looks expensive on a lease-adjusted basis.

Common Mistakes

1. Adding rent only to the denominator. If you add rent back to EBITDA, you must add capitalized leases to enterprise value. Otherwise the multiple is inconsistent.
2. Mixing IFRS 16 and pre-IFRS-16 data. Historical EBITDA reported before 2019 excludes lease assets that post-2019 EBITDA captures. Multi-year trend analysis needs careful normalization.
3. Confusing all rent with capitalizable rent. Short-term rent, like temporary office space, is operating expense, not financing-equivalent. Only long-term rent should be added back.
4. Ignoring sale-leaseback distortions. A sale-leaseback raises cash, lowers debt, and replaces depreciation with rent. EBITDAR holds the picture roughly constant if applied consistently, but EBITDA alone shifts dramatically.
5. Forgetting maintenance capex. Owned aircraft require capex; leased aircraft do not, but the lease payment is the equivalent. EV/EBITDAR is still better paired with maintenance capex or owned asset replacement cycles.

Frequently Asked Questions

What is the EV/EBITDAR ratio in simple terms? The EV/EBITDAR ratio is enterprise value plus lease obligations divided by earnings before interest, taxes, depreciation, amortization, and rent. It lets you compare lease-heavy and ownership-heavy firms in the same industry.

How does the EV/EBITDAR ratio affect investment decisions? It is the default multiple for airlines, hotels, casinos, and similar industries because it removes the lease-versus-own distortion. Equity investors and acquirers use it to spot peers that look cheap on lease-adjusted economics.

What is a real-world example of the EV/EBITDAR ratio? US legacy airlines and low-cost carriers are usually compared on EV/EBITDAR rather than EV/EBITDA because some operate primarily leased fleets while others rely on owned aircraft.

How can investors use the EV/EBITDAR ratio effectively? Add capitalized leases to enterprise value whenever you add rent back. Use the post-IFRS-16 balance sheet figure rather than estimating present values. Cross-check with EV/Sales and operating margin to avoid being fooled by structural lease economics.

How is the EV/EBITDAR ratio different from EV/EBITDA? EV/EBITDA leaves rent inside operating expense and ignores capitalized leases. EV/EBITDAR adds both back. The two multiples can diverge by 30% or more for heavy lessees.

Sources

1. CFA Institute. Non-Current Liabilities. https://www.cfainstitute.org/insights/professional-learning/refresher-readings/2026/non-current-liabilities
2. Damodaran, A. Dealing with Operating Leases in Valuation. NYU Stern. https://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/leases.pdf
3. Mauboussin, M. and Callahan, D. Valuation Multiples. Morgan Stanley Counterpoint Global Insights. https://www.morganstanley.com/im/publication/insights/articles/article_valuationmultiples.pdf
4. Wall Street Prep. EBITDAR Definition. https://www.wallstreetprep.com/knowledge/ebitdar/

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.