EBITDAX - Earnings Before Interest, Tax, Depreciation, Amortization and Exploration

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Updated September 30, 2020

EBITDAX Definition

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.

Essentially, it's a way to evaluate a company's performance without having to factor in financing decisions, accounting decisions, unusual events, tax environments or variations in the cost of exploration.

EBITDAX Formula - How to Calculate EBITDAX

EBITDAX measures ongoing operating profitability by adding back non-cash expenses as well as expenses a firm would incur for exploration costs.

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 Expenses

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

EBITDAX versus EBITDA - What's the Difference?

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.

EBITDAX, like EBITDA, can be deceptive when applied incorrectly. It is especially unsuitable for firms saddled with high debt loads or those that must frequently upgrade costly equipment. Furthermore, EBITDAX can be trumpeted by companies with low net income or terrible exploration talent in an effort to "window-dress" their profitability. EBITDAX will almost always be higher than reported net income.

Also, because EBITDAX isn't regulated by Generally Accepted Accounting Principles (GAAP, a framework of accounting standards, rules and procedures), it remains at the discretion of the company to decide what is, and is not, included in the calculation from one period to the next. Therefore, when analyzing a firm's EBITDAX, it is best to do so in conjunction with other factors such as capital expenditures, changes in working capital requirements, debt payments, and, of course, exploration expenses.

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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