Debt Ratio Regression: January 2015
Variables used in the regression
- Debt
Ratio = Debt/ (Market Value of Equity + Debt): If you can get market value
of debt, use it. Else, use book value of debt.
- Pre-tax ROC = EBIT/ (Book Debt + Book Equity - Cash)
- Expected growth rate in revenues - next 2 years= You can use expected or even historical earnings growth, if you don't have a revenue growth forecast
- EBITDA/
Enterprise Value = EBITDA/ (Market Value of Equity + Book value of Debt - Cash)
Model Summarya
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Model
|
R
|
R
Square
|
Adjusted
R Square
|
Std.
Error of the Estimate
|
1
|
.429b
|
.184
|
.183
|
12.67747
|
a. Broad Group = United States
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b. Predictors: (Constant), Return on
Capital (ROC or ROIC), EBITDA/EV, Expected growth in revenues - Next 2
years
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Coefficientsa,b,c
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Model
|
Unstandardized
Coefficients
|
Standardized
Coefficients
|
t
|
Sig.
|
||
B
|
Std.
Error
|
Beta
|
||||
1
|
(Constant)
|
.236
|
.008
|
|
30.324
|
.000
|
Expected growth in revenues - Next 2
years
|
-.023
|
.014
|
-.032
|
-1.613
|
.107
|
|
EBITDA/EV
|
.548
|
.071
|
.152
|
7.672
|
.000
|
|
Return on Capital (ROC or ROIC)
|
-.367
|
.017
|
-.398
|
-21.034
|
.000
|
|
a. Broad Group = United States
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b. Dependent Variable: Market Debt to
Capital Ratio
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c. Weighted Least Squares Regression -
Weighted by Market Cap (in US $)
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Model
Summary
|
||||
Model
|
R
|
R
Square
|
Adjusted
R Square
|
Std.
Error of the Estimate
|
1
|
.472a
|
.222
|
.222
|
10.43826
|
a. Predictors: (Constant), Return on
Capital (ROC or ROIC), Expected growth in revenues - Next 2 years,
EBITDA/EV
|
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Coefficientsa,b
|
||||||
Model
|
Unstandardized
Coefficients
|
Standardized
Coefficients
|
t
|
Sig.
|
||
B
|
Std.
Error
|
Beta
|
||||
1
|
(Constant)
|
.278
|
.003
|
|
81.203
|
.000
|
Expected growth in revenues - Next 2
years
|
-.008
|
.005
|
-.014
|
-1.604
|
.109
|
|
EBITDA/EV
|
.396
|
.023
|
.147
|
16.873
|
.000
|
|
Return on Capital (ROC or ROIC)
|
-.475
|
.009
|
-.433
|
-50.654
|
.000
|
|
a. Dependent Variable: Market Debt to
Capital Ratio
|
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b. Weighted Least Squares Regression -
Weighted by Market Cap (in US $)
|
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- How do I use this regression?
Assume that you want to estimate the market debt ratio for a firm with the following characteristics, using the US regression
EBITDA/ Enterprise Value = 8%
Pre-tax return on capital = 20%
Expected growth rate in revenues = 15%
- Predicted Value
Expected Debt Ratio= .236 -.023 (.15) + .548 (.08) -0.367 (.20) = .203 or 20.30%
If your predicted value is less than zero, your predicted debt ratio is zero.