What is OIBDA?

Investing Image Gallery Traders work the floor of the New York Stock Exchange on Feb. 1, 2011 as the Dow Jones Industrial Average soared to its highest level in two years, amid strong earnings reports from top companies. See more investing pictures.
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Earnings reports serve as the quarterly report cards for all publicly traded companies. Four times a year, every company with a stock market symbol issues a lengthy report to stockholders detailing how much money it earned in the past three months, how much money it spent, and most importantly, how much money is left over -- a little thing called profit.

But modern earnings reports are far from dry documents with an earnings column, an expenses column and a single number representing net income. Earnings reports are equal parts accounting statements and marketing materials. The goal is to please current investors and attract future investors with the most optimistic angle on the company's performance.

That's how we get a figure like "operating income before depreciation and amortization," or OIBDA. By choosing to report earnings as OIBDA, a company can ignore a long list of non-operating expenses -- things like tax deductions, long-term capital investments in equipment, investments in "intangible" assets like trademarks -- and add all of those losses back into the "gain"column.

To understand why this is a big deal, you need to know a little about how business accounting works. Traditionally, if an accountant wanted to calculate net income (aka profit), he or she would follow a set of generally accepted rules conveniently called generally accepted accounting practices (GAAP) established by the Federal Accounting Standards Advisory Board. Start with gross income, subtract all expenses -- and the result is profit.

But in the business world, not all income and expenses are treated equally. There is operating income and expenses, and there is non-operating income and expenses. Many companies and investors believe that only operating profit (operating income minus operating expenses) is a reliable indicator of a company's value and that everything else -- legal fees from a lawsuit, earnings from the sale of part of the business and other "one-time" transactions -- only distort the real profitability of the enterprise [source: Investopedia].

OIBDA provides a non-GAAP method for stripping away all of the "extra" costs of doing business to reveal the true value of a company. Or at least that's what the earnings report authors want you to believe. Keep reading for more on the advantages and disadvantages of using OIBDA over other accounting methods.