Impact of EBITDA on Capital Expenditures: Degree of EBITDA Leverage

By:
Dr. Yatin Bhagwat,
Dr. Marinus DeBruine
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Prior studies support the notion that Earnings before Interest, Depreciation and Amortization (EBITDA) provides a significant share of a company’s Capital Expenditures (CAPX). In this paper the authors use Average Capital Expenditures Intensity to select industries (based on the 3-digit SIC) with above average capital expenditures. The study includes companies belonging to Petroleum refining, Automobile manufacturing, Telephone Communications, Electric Services, and Natural Gas Utility industry groups. The log linear regression model provides a simple but robust technique to estimate a new metric, Degree of EBITDA Leverage, a measure that quantifies the elasticity of EBITDA and CAPX. Not surprisingly, an extension to two other forms of earnings measurement – Earnings before Interest and Taxes (EBIT) and Income from Continued Operations (IB) produces a significantly weaker relationship with CAPX – presumably because those measures contain accrual accounting measures that distort the more direct relationship between the two cash flow measures of EBITDA and CAPX.


Keywords: Degree of EBITDA Leverage, Capital Expenditures, Elasticity
Stream: Economics and Management
Presentation Type: Paper Presentation in English
Paper: Impact of EBITDA on Capital Expenditures


Dr. Yatin Bhagwat

Professor of Finance, Department of Finance
Seidman College of Business, Grand Valley State University

Grand Rapids, Michigan, USA


Dr. Marinus DeBruine

Associate Professor of Accounting, Department of Accounting & Taxation
Seidman College of Business, Grand Valley State University

Grand Rapids, Michigan, USA


Ref: I07P0868