effect of capitalizing vs. expensing on EBITDA


capitlizing = > higher EBITDA

expensing => lower EBITDA

Could somebody confirm? I am a little confused because of this table:


Because gains and losses (along with depreciation and amortization) are reported between EBITDA and EBIT, a large capital expenditure (if expensed, not capitalized) would be reported there as well. Thus, EBITDA doesn’t change whether you expense or capitalize.

So you refer to EBIT and EBITDA when they actually mean adjusted EBIT and adjusted EBITDA?

Gross profit+other operating income-operating expense= Ebitda

Ebitda-depreciation+ other gains/loss-interest costs= pretax Income

When you expense, all of the payment is rent, which is classified as operating expense before come to ebitda

when u capitalize, the lease payment consists of interest cost and is depreciation/amortization item, which comes after u calculate ebitda

so in early years if u expense, as u record higher operating expense thanks to rent, your ebitda is lower

From what I see, EBITDA does not change (revenue or sales will be uneffected which makes sense) but your gross margin will be impacted whether you expense it or capitalise / depreciate it. Just think about an item that cost 50,000 with a salvage value of 5,000 with an expected life of 10 years. Expensing will cost you 50,000 on the first year but your depn expense it you capitalised it (assuming SL) would be 4,500. Thus, both reporting methods will have equal EBITDA but different EBIT.

Sorry if this all makes sense to you (or if the simplicity offends you lol)


I use your example: cost 50,000 with a salvage value of 5,000 with an expected life of 10 years


Any comments?

I think that limitations of EBITDA as cash flow measure are ignoring Fixed Capital Investment and Working Capital Investment. Could you tell me where I should report these gains and losses that you’re writing about?


Logically, when we use capitalising, there is no gain or loss. Just changing asset for asset (cash for long term asset). Maybe it’s something wrong with my definition of EBITDA…

Not sure I am following your logic here.

If you expense, the full capital investment is deducted on your IS above the EBITDA line, since it is operating expense, so there will be a lowering of EBITDA.

If you capitalize, only a fraction of the expense is deducted from your IS (depreciation), and this is below the EBITDA line so there would be no effect to EBITDA.

Why then would there be no effect whether you expense or capitalize? That can’t be correct unless I am missing something.

PS Capital Expenditures are not reported on the IS at all.