Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Earnings Before Interest, Tax, Depreciation, Amortization and Exploration (EBITDAX)

What it is:

A variation of EBITDA, EBITDAX is a measure used by natural resource exploration companies to reflect ongoing or core profitability. The acronym stands for earnings before interest, taxes, depreciation, amortization and exploration expense.

How it works (Example):

EBITDAX is used to measure the ongoing operating profitability by adding back non-cash expenses as well as the expenses the firm would incur for costs of exploration.

A company’s income statement is used to calculate EBITDAX.  It is not included as a line item, but can be easily derived by using the other line items that must be reported on an income statement.

The formula for EBITDAX is:

EBITDAX = EBIT + Depreciation + Amortization + Exploration Expense

Let's take a look at a hypothetical income statement for an oil and gas exploration company, Company XYZ:

To calculate EBITDAX, we find the line items for EBIT ($650,000), depreciation ($50,000), amortization ($20,000) and exploration expense ($80,000) and then use the formula above:

EBITDAX = 650,000 + 50,000 + 20,000 + 80,000 = 800,000

Why it Matters:

EBITDA provides an important gauge of a company's ability to repay a loan, as it is essentially the income a business has free for interest payments. EBITDAX goes a step further by adding back exploration expenses to give a measure of ongoing profitability to assist in financing further exploration efforts. Both measurements are non-GAAP (Generally Accepted Accounting Principles).

Critics of EBITDA and EBITDAX claim that because both measurements are non-GAAP, they give companies wiggle room to misrepresent financial health by inflating expenses. Critics also claim more traditional GAAP measurements of cash flow and operating income give a more accurate financial picture.

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