The Relationship Between Earnings Before Interest and Taxes (EBIT) and Financial

Distress in the Renewable Energy Industry

Dissertation Manuscript

Submitted to Northcentral University

School of Business

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in Partial Fulfillment of the

Requirements for the Degree of

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Doctor of Business Administration
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by

Emmanuel Sarpong
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La Jolla, California

May 2021
DocuSign Envelope ID: 85245840-11E6-4577-9218-1EE7D71AA7F6

Approval Page
The Relationship Between Earnings Before Interest and Taxes (EBIT) and Financial
Distress in the Renewable Energy Industry

By

Emmanuel Sarpong

Approved by the Doctoral Committee:

PhD 06/08/2021 | 13:45:28 MST

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Dissertation Chair: Dereck Barr-Pulliam Degree Held Date
IE Ph.D. 06/08/2021 | 17:01:06 MST

Committee Member: Richard Fendler Degree Held Date

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06/09/2021 | 06:46:54 MST

Ph.D., MBA
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Committee Member: Leila Sopko Degree Held Date

 Abstract

The global economy's future depends heavily on renewable energy. The renewable energy sector

is becoming increasingly important because renewable energy is inexhaustible and

environmentally sustainable; however, this sector is capital-intensive and vulnerable to financial

distress. Earnings before interest and taxes (EBIT) are a significant predictor of financial

performance. The lack of research into the relationship between EBIT and financial distress

forms the basis of this study. In the current study, the researcher evaluated the relationship

between EBIT and financial distress in the United States' renewable energy sector. The

researcher collected EBIT and financial distress from a sample of renewable firms. The

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researcher then conducted a linear regression analysis to examine the said relationship.
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 Acknowledgments

First, I wish to thank my dissertation committee. Without their guidance, I would not have made
it. Dr. Richard Fender and Dr. Leila Sopko served as wise committee members, and Professor
Dereck Barr-Pulliam, my Chair, went above and beyond to help me reach my goal.

To my friends, parents, and siblings, you put up with me being distracted and missing many
events. I am forever grateful for your patience and understanding. I hope to have time now to
reconnect with each of you.

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 Table of Contents

List of Tables .................................................................................................................................. v

List of Figures ............................................................................................................................... vii

Chapter 1: Introduction ................................................................................................................... 1

Background of Study ................................................................................................................ 2

Statement of the Problem .......................................................................................................... 6
Purpose of the Study ................................................................................................................. 7
Theoretical/Conceptual Framework.......................................................................................... 8
Introduction to Research Methodology and Design ................................................................. 9
Nature of the Study ................................................................................................................. 12
Research Questions ................................................................................................................. 14
Hypotheses .............................................................................................................................. 14
Significance of the Study ........................................................................................................ 15
Definitions of Key Terms ....................................................................................................... 15

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Summary ................................................................................................................................. 16

Chapter 2: Literature Review ........................................................................................................ 17

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Introduction ............................................................................................................................. 17
Literature Search Strategy....................................................................................................... 17
Theoretical Framework ........................................................................................................... 18
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Financial Performance ............................................................................................................ 26
The Concept of EBIT .............................................................................................................. 32
Financial Distress .................................................................................................................... 34
The Renewable Energy Sector ................................................................................................ 44
Summary ................................................................................................................................. 47
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Chapter 3: Methodology ............................................................................................................... 49

Introduction ............................................................................................................................. 49
Statement of the Problem ........................................................................................................ 49
Research Questions ................................................................................................................. 50
Research Methodology and Design ........................................................................................ 51
Population and Sample Selection............................................................................................ 54
Instrumentation ....................................................................................................................... 55
Operational Definitions of Variables ...................................................................................... 55
Study Procedures..................................................................................................................... 57
Data Analysis .......................................................................................................................... 57
Threats to Validity .................................................................................................................. 61
Ethical Procedures .................................................................................................................. 64
Summary ................................................................................................................................. 64

Chapter 4: Findings ....................................................................................................................... 66

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 Introduction ............................................................................................................................. 66
Validity and Reliability of the Data ........................................................................................ 67
Results ..................................................................................................................................... 71
Results of Multiple Linear Regression Analysis for Research Question 1/Hypothesis 1 ....... 77
Results of Multiple Linear Regression Analysis for Research Question 2/Hypothesis 2 ....... 79
Results of Multiple Linear Regression Analysis for Research Question 3/Hypothesis 3 ....... 81
Summary ................................................................................................................................. 83

Chapter 5: Implications, Recommendations, and Conclusions .................................................... 85

Implications............................................................................................................................. 86
Recommendations for Practice ............................................................................................... 93
Recommendations for Future Research .................................................................................. 95
Conclusions ............................................................................................................................. 97

References ..................................................................................................................................... 99

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Appendix A: IRB Approval ........................................................................................................ 121
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 List of Tables

Table 1. Variables, Scales of Measurement, Variable Type, and Operationalization .................. 56

Table 2. Descriptive Statistics Summaries of Study Variables at Years 2018 and 2019 ............. 74

Table 3. Independent Sample t-test Results of Differences of Data of Study Variables at

Years 2018 and 2019 ..................................................................................................... 75

Table 4. Skewness and Kurtosis of Dependent Variables............................................................ 76

Table 5. Correlation Analyses Between EBIT and Measures of Financial Distress (n = 44) ...... 77

Table 6. Results of Multiple Linear Regression to Test Hypothesis 1......................................... 79

Table 7. Results of Multiple Linear Regression to Test Hypothesis 2......................................... 81

Table 8. Results of Multiple Linear Regression to Test Hypothesis 3......................................... 83

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 List of Figures

Figure 1. How Profitability Relates to EBIT and Informs Financial Reporting Quality .............. 26

Figure 2. Boxplot of Initial Dataset of EBIT ................................................................................ 68

Figure 3. Boxplot of Initial Dataset of Equity .............................................................................. 69

Figure 4. Boxplot of Initial Dataset of Net Income ...................................................................... 70

Figure 5. Boxplot of Initial Dataset of Liquidity .......................................................................... 71

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Chapter 1: Introduction

In the modern global economy, fossil fuels are the primary energy source (Nematollahi et

al., 2016). Their prevalence is problematic, given that they are nonrenewable, subject to

depletion, and contribute to environmental pollution through greenhouse gas emissions

(Tomczak, 2019). According to Nematollahi et al. (2016), the current fossil fuel reserves may

only serve the ever-growing economy for the next 40 years, after which nations will need to

secure other sources of energy. Increasing demand for such fuels over the 20th century has led to

increased energy consumption and corresponding climate change. Additionally, the increasing

demand has made fossil fuels a precious commodity, which has fueled military and economic

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conflicts in different parts of the world (Nematollahi et al., 2016; Tomczak, 2019). Some
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countries, however, have shifted away from this conflict for limited fossil fuel resources and

instead focused on using renewable energy resources (Nematollahi et al., 2016). Consequently,
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many nations are increasingly focusing on developing renewable resources and have a

corresponding economy developing around the infrastructure necessary to help create that

economy.
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While the renewable sector has received a significant endorsement from different

stakeholders such as policymakers and environmentalists, financing operations within green

industries while simultaneously ensuring adherence to environmental conservation standards has

been quite a concern. Kyriazopoulos (2017) found that financing operations in the nonrenewable

sector are more costly than doing the same in the nonrenewable sector. Scalzer et al. (2019)

pointed to lesser operational requirements in the nonrenewable sector to account for the

difference in operational costs between them. For instance, coal-fired power plants generate

more electrical energy at higher efficiency levels than solar panels. This apparent advantage of

nonrenewable sources is always short-lived, however, considering the eminent fossil fuel
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depletion. Stram (2016) reiterated that renewable sources appear costly in the short-term but are

far less costly in the long-term. As such, renewable energy companies are more predisposed to

financial distress in the short-term, considering the intensive costs of such firms' operation

characteristics.

Predicting the possibility of financial problems is essential to prevent these companies

from stalling or even going bankrupt (Tomczak, 2019). Previous scholars have investigated

various predictors of financial issues, including profitability (Gombola et al., 2016), leverage

ratios (Arslan et al., 2017), earnings-to-assets ratio (Lazzem & Jilani, 2018), earnings before

interest and taxes (EBIT; Mostofa et al., 2016), and capacity to pay out dividends (Fitri et al.,

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2016). Most existing studies on financial performance are too generic (Verriest et al., 2018),
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leaving a targeted investigation in the energy industries, especially in renewable energy

companies, unaddressed no literature on the topic. Previous researchers have examined the
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impact of EBIT and corporate financial performance (Strouhal et al., 2018) or EBIT association

on a firm’s investment decisions (Unuigbokhai et al., 2014). EBIT has been used successfully to

determine financial performance. It can help inform investors regarding the degree to which a
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firm can service its debts and indicate the returns expected from invested capital (Kisman &

Krisandi, 2019). As such, EBIT is a useful tool for assessing the revenue generation capacity of a

firm.

Background of Study

The eco-friendliness, availability, cleanliness, and sustainability of renewable energy

resources have made some policymakers and researchers believe it to be among the best ways of

enhancing environmental sustainability (Ozorhon et al., 2018). Countries such as China have

resorted to increased energy production by using geothermal, biomass, nonutility hydro, wind,

and solar thermal resources (Ahmed et al., 2016). The renewable energy industry has raised
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much interest among policymakers and industrialists globally (Murray et al., 2017). The

International Energy Agency (IEA) pointed out that renewable energy is the global energy factor

with the highest growth rates yearly.

As a result, other countries have increased their renewable energy share. For example,

some of the European Union (EU) countries decided to raise their Renewable Energy Source

(RES) share by 20% by the year 2020 (Noothout et al., 2016). Noothout et al. posited green

industries to be the primary source of energy of the future, given that nonrenewable energy

sources are facing imminent depletion (Murray et al., 2017). Murray et al. characterized firms in

the energy sector as being capital intensive because funds are required to service or replace

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energy generating equipment periodically. Therefore, renewable energy firms' implications may
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require them to slightly alter their capital structure because they need to finance their operations

and service or replace equipment regularly. According to Mazzucato and Semieniuk (2018),
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renewable energy firms are most probably financed through debt, implying that interest is a

significant determinant of their financial performance in terms of net income. Additionally,

renewable energy firms are sometimes subject to tax cuts because they are considered
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environmental sustainability promoters. EBIT has become a critical tool for predicting financial

distress in such firms.

EBIT is a widely used financial measure in financial markets for several purposes,

including financial statement analysis, credit analysis, and valuation (Cormier et al., 2017; Lazăr

& Istrate, 2018). According to Dempster and Oliver (2019), the increase in EBIT use has surged,

despite potential weaknesses and flaws, as its benefits outstrip criticism, especially regarding

analytical and valuation metrics. It is unsurprising, therefore, that in the wake of a tide of

corporate malfeasance, the validity of using EBIT has gained acceptance in quantifying its
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impact on capital structure and, consequently, the firm’s financial stability (Jol & Stommel,

2016; Lazăr & Istrate, 2018; Li, 2016).

As Bouwens et al. (2019) indicated, EBIT has several benefits. For instance, EBIT

provides investors with detailed information on the firms’ debt servicing ability and its critical

underlying operating earnings, operating margins, and return on the invested capital. Second,

scholars have argued managers can use that EBIT to assess how effectively a firm can generate

earnings or revenue over a specified time to meet its current liabilities (Dempster & Oliver,

2019; Lazăr & Istrate, 2018). Cormier et al. (2017) expressed similar thoughts, noting that EBIT

is an invaluable tool used to gauge the business’ financial performance as stakeholders can use it

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to estimate its earnings from its core activities against the potential liabilities. As a result,
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prospective investors can use EBIT to tell how well a firm operates in terms of costs and profits

(Lazăr & Istrate, 2018).

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According to Dempster and Oliver (2019), the increase in EBIT use has surged despite

potential weaknesses and flaws because its benefits outstrip its weaknesses. By focusing on the

relationship between EBIT and financial distress, the study’s findings may enhance the
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understanding of EBIT on firms’ performance and, subsequently, shareholder value (Ardalan,

2017). The current researcher investigated various value maximization theory constructs, such as

EBIT, to help understand its impacts on companies' financial performance in the renewable

energy industry (Ardalan, 2017). The renewable energy industry and its associated projects

generally appear to have high capital risks in developing financial markets (Ardalan, 2017; Xu et

al., 2017). Some scholars have paid much attention to changes in oil prices, renewable energy

stocks, carbon prices, and equity indices.

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Tomczak et al. (2020) previously investigated companies' financial performance in green

industries by examining the relationship between the returns and changes in oil prices, stocks,

carbon prices, carbon pass-through rates, and equity indices (Tomczak et al., 2020). Previous

scholars studying this topic have failed to address the relationship between EBIT and financial

pain for companies in the renewable energy sector.

According to Paun (2017), EBIT pairs with negative returns on equity (ROE). For

instance, EBIT values for solar producers showed negative performance as they had newly

entered the market. New entrants are bound to encounter EBIT, which ushers in financial

troubles. The ratio analysis results for the companies raised questions as most were in a state of

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financial distress, while others were at a risk of bankruptcy based on negative returns (Paun,

2017).
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Tomczak et al. (2020) also agreed with Paun’s (2017) results. According to Tomczak et
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al. (2020), the probability of bankruptcy was high. An analysis of 66 electric companies from 26

nations found that shifting to renewable energy production reduced a corporation’s long-term

financial performance capacity. The Tomczak et al. (2020) study included a limitation by
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employing unbalanced data. The majority of the firms came from Poland, thus initiating the

generalization problem. According to Renewables Now (2020), limited cost-competitive fosters

EBIT for renewable energy companies. German companies EBITDA and EBIT despite revenue

increases. Earnings before interest, tax, depreciation, and amortization (EBITDA) were negative

€0.9 million (USD 1.1M) compared to positive €23.2 per year before, while EBIT was down to

negative €3 million from positive €20 million (Rezec & Scholtens, 2017). The company (Manz

AG) generated its highest-ever-first-quarter revenue in January–March 2018. This performance

showed the company’s efforts to increase its competitiveness and profitability are in the right
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direction. It maintained its full-year outlook for revenue growth of 10% to 14% and a slightly

positive EBIT, excluding one-offs (Renewables Now, 2020). In the current study, the researcher

aimed to identify factors contributing to the EBIT and its relationship with companies' financial

distress within the renewable energy sector.

Statement of the Problem

The problem on which the current researcher focused was the absence of research on

EBIT and its capacity to predict financial distress in the renewable energy sector. Previous

researchers such as Dempster and Oliver (2019) have shown that EBIT is proportional to firm

performance, which implies that firms with higher EBIT values are likely to exhibit financial

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troubles; however, there is no explicit demonstration of this among businesses within the
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renewable energy industry (Lazăr & Istrate, 2018; Verriest et al., 2018). Several scholars have

focused on the impact of EBIT on companies' financial performance (Bouwens et al., 2019;
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Lazăr & Istrate, 2018; Li, 2016). Following an examination of the literature, however, there

emerged no known understanding of how EBIT might associate with the financial pain of

companies operating in the renewable energy industry.

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There is a literature gap regarding the relationship between EBIT and financial distress,

specifically within the renewable energy industry. Applications of EBIT assessment have already

occurred among businesses in general, without a specific examination of whether EBIT is

associated with poor financial performance among green companies. The absence of studies in

which researchers examine EBIT’s impact on green businesses' financial performance possibly

relates to too many researchers overlooking renewable energy generation's financial performance

aspect. To address this gap in the literature, the researcher conducted a quantitative correlational

study to establish the relationship between EBIT and the financial worries of companies

operating in the renewable energy industry.

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Purpose of the Study

The purpose of the current study was to understand the relationship between earnings

before interest and tax (EBIT) and financial distress within companies in the renewable energy

sector. The findings of this study determined whether a relationship exists between EBIT and

financial troubles. If such a relationship exists, corporate leaders may need to inform their

decisions regarding organizational operations using some EBIT input as a metric. In this study,

the researcher provided an enumeration of companies impacted by EBIT, factors contributing to

the EBIT, financial ratios illustrating negative performance in green industries, and viable

recommendations for addressing financial distress. The researcher assessed and compared

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financial standings between companies generating energy from fossil fuels from ones creating
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renewable energy. The goal was to identify the factors contributing to the EBIT in specific

companies within the renewable energy sector. Consequently, identifying factors that initiate
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negative returns helped the researcher to generate viable recommendations.

The idea foundational to this research was to understand the relationship between

earnings before interest and tax and financial distress within companies in the United States'
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renewable energy sector. Financial distress in this research referred to measuring the Altman Z

score's elements, which calculates critical financial ratios for companies operating in renewable

energy. The main variables of the research are outlined in the following subsections.

EBIT

EBIT is an evaluative characterized by factors such as interest and taxes. EBIT was

considered a variable related to renewable energy firms. Consequently, EBIT was an

independent variable impacting the dependent variable of financial troubles or profitability.

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Financial Distress

In the context of this study, financial distress was considered a state wherein a company

is experiencing financial problems, such as losses, inabilities to meet creditors’ obligations, and

bankruptcy (Altman et al., 2017).

Theoretical/Conceptual Framework

Financial distress is a condition in which a firm cannot meet its debt obligations (Altman

et al., 2017). If a company is unable to service its debts for extended periods, insolvency might

result. Generally, financial distress is related to a company’s capital structure. If a company

funds its operations mainly through debt financing, it has a higher risk of not meeting its debt

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obligations. This risk is more pronounced in capital-intensive companies that require vast sums

of capital to finance their operations.

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On the contrary, if a company mainly funds through equity financing, it has a lower risk
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of not meeting debt obligations because they are just minor (Gao et al., 2018). Equity financing,

however, may not be a reliable source of funds for running operations, meaning that it is

problematic to rely upon investors for raising a particular fixed amount of funds. As such, equity
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financing is mainly applicable to companies that are not capital intensive. The energy sector is

generally classified as capital-intensive, implying debt financing is common in green industries.

Renewable energy companies, which are the main focus of the current research, also fall into the

supposedly capital-intensive energy sector; therefore, they have a greater risk of experiencing

financial distress (Baghai et al., 2020).

Existing literature reveals several predictors of financial distress: liquidity, profitability,

and leverage, among others (Chiaramonte & Casu, 2017). Several scholars have established that

companies with lower liquidity ratios are at a higher risk of financial troubles because they are

vulnerable to adverse shocks (Chiaramonte & Casu, 2017; Kamaluddin et al., 2019; Mselmi et
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al., 2017). Lower leverage ratios also cause financial pain in the same manner that lower

liquidity levels do. Lack of profitability is also associated with financial distress (Mselmi et al.,

2017). In particular, a lack of profitability over extended periods implies the company is

experiencing an unsustainable economic performance. In such cases, the company may lose a

significant portion of its equity financiers, causing them to rely solely on debt financiers. If

negative profitability continues for a length of time, the company is unlikely to raise enough

capital to pay off its long-term and short-term debts. One of the profitability measures is EBIT,

which refers to the earnings before interest and taxes (Schoenem et al., 2016). Concerning

financial distress, EBIT illustrates whether existing profitability figures will enable a company to

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meet its tax and debt obligations.
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Introduction to Research Methodology and Design

The researcher conducted a quantitative regression study to identify the relationship

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between EBIT and firms' financial performance in the renewable energy industry. The adopted

regression model described how independent variables are related to dependent variables, with

shifts in the independent variables associated with the dependent variables' changes. Regression
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analysis can be used to predict numeric responses and show cause and effect. Using regression

analysis, an estimate can be made regarding the effect a variable has on future outcomes. As a

quantitative study, a regression model was employed to analyze and predict EBIT's impact on the

financial distress of companies operating in the renewable energy industry. A possible approach

to explore this was that of Kelly et al. (2014), who suggested that researchers use regression

analysis to predict financial distress based on EBIT and EBITDA variables.

Consequently, this made the regression approach suitable for the current study. One of

the assumptions underpinning this research design is that the variable is not influenced. The

researcher sought to establish the relationship between them based on the natural interaction
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between a given set of variables (Apuke, 2017). In this research design, the independent and

dependent variables were not subject to manipulations, unlike experimental designs. The study

was based on the ontological philosophy, which seeks to explain the association between or

among variables because of mutual interactions. The study target population included companies

operating in the renewable energy industry in the United States. The researcher used historical

financial statements from 27 companies listed on the U.S. Securities and Exchange Commission

through a nonprobability sampling technique.

Twenty-seven companies are operating in the renewable energy industry. Company data

were accessed through the company’s websites from which the selected company's financial data

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were obtained. With this, the relevant elements of the research retrieved from the period of the
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last few years. Various steps were taken during the sampling procedure, primarily when selecting

the 27 companies. The sampled companies were purposely and conveniently selected to help the
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researcher obtain data from the companies (Etikan et al., 2016). Focusing on financial figures of

different corporations enabled the researcher to gauge performance, identify gaps inducing

financial constraints, and note the factors causing financial distress to firms in the renewable
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energy sector. The researcher mainly used archives (i.e., historical financial statements) from

2018 and 2019 to assess financial performance through ratio analysis employment. This selection

approach allowed the researcher to collect data from companies who have common experiences.

In this case, this included firms operating in the renewable energy industry that are facing

financial distress.

Despite many companies listed on the stock exchange, companies from other sectors or

industries were discarded. These companies were discarded because their balance sheet structure

on EBIT differs from those operating in the renewable energy industry, partially because of
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financing mode. The companies that were selected for the study were required to meet the

criteria for the description of financial distress, including evidence of layoffs, restructurings, or

missed dividend payments, a low-interest coverage ratio, cash flow less than current maturities

of long-term debt, the change in equity price or an EBIT, and negative net income before special

items. Because the researcher conducted the study based on secondary sources that are readily

available on various public domains and can be easily accessed without any prior permission or

approval of the company; because these companies are listed by the U.S. Securities and

Exchange Commission, no prior permission was required because data on the U.S. Securities and

Exchange Commission website is publicly available (Post & Byron, 2014as; Riasi, 2015).

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Data Analysis
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The researcher analyzed the secondary data collected in this study using the Statistical

Package for Social Science (SPSS) 24.0 statistical tool. The SPSS software tool helps researchers
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to conduct a statistical analysis of various processes associated with the present study, including

analyzing and reporting financial information (Gray et al., 2016). The researcher used a

regression model to test the hypotheses and evaluate the relationship between the dependent and
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independent variables. In this particular case, this was the relationship between EBIT and

financial performance. The SPSS software was used to determine the scale of measurement,

assisting the researcher in developing the relationship between the study variables (Tarhini et al.,

2016). Furthermore, the researcher generated descriptive tables and used SPSS to apply

regression analysis to represent firms operating in the renewable energy sector in response to

EBIT. The collected data were entered into SPSS for further analysis to attain the outcome of

this research.

The associated assumption for descriptive statistics in this research includes the

independence of the data. This is because the financial data of all companies are different based
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on their financial performance. With this, variances are homogeneous because all the companies

were from the same industry; therefore, any influence in the industry affects the performance of

all companies.

Nature of the Study

The researcher conducted a quantitative correlational study to examine the relationship

between EBIT and firms' financial performance in the renewable energy industry. In particular,

the correlational case involved linear regression, in which EBIT was the dependent variable, and

financial distress was the dependent variable. The researcher based this approach on the

recommendations of Kelly et al. (2014), who suggested that researchers use regression analysis

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to predict financial troubles based on EBIT and EBITDA variables.
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Consequently, this made the regression approach suitable for the current study. One of

the assumptions underpinning this research design was that although the independent variable
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influences the dependent variable, no manipulation of the independent variable could occur. The

researcher aimed to identify the relationship between them based on the natural interaction

existing between a given set of variables (Apuke, 2017). In this research design, the independent
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and dependent variables were not subject to manipulation.

The target population consisted of companies operating in the renewable energy industry

in the United States. The researcher used historical financial statements from 27 companies listed

on the U.S. Securities and Exchange Commission through a nonprobability sampling technique.

At the time of this study, approximately 27 companies were operating in the renewable energy

sector in the United States. The companies’ websites permit access to the companies' data, from

which the researcher obtained the needed financial data. From the financial data collected, given

a 5-year timeframe, the researcher retrieved the relevant required elements. The targeted

companies were purposely and conveniently selected during sampling to help the researcher
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obtain data from the companies (Etikan et al., 2016). By focusing on financial figures of different

corporations, the researcher could gauge performance, identify gaps inducing financial

constraints, and note the factors causing financial distress to firms in the renewable energy

sector.

The companies selected for the current study were required to meet the criteria for the

description of financial struggles, including evidence of layoffs, restructurings, or missed

dividend payments, a low-interest coverage ratio, cash flow less than current maturities of long-

term debt, the change in equity price or an EBIT, and negative net income before extraordinary

items. The researcher conducted the study based on secondary sources available on various

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public domains and did not require the company’s prior approval or permission, which did not
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hamper access. In other words, no prior permission was required regarding these companies

because the U.S. Securities and Exchange Commission website is publicly available and lists
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their data (Post & Byron, 2014; Riasi, 2015).

As previously indicated, the results of a series of linear regression analyses revealed the

relationship, if any, between EBIT and financial distress. The researcher analyzed the secondary
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quantitative data collected in this study using the Statistical Package for Social Science (SPSS)

24.0 statistical tool. The SPSS software tool contains all the essential regression analysis

modules (Gray et al., 2016). Furthermore, with the help of SPSS, the researcher generated

descriptive tables and applied regression analysis to represent the performance of firms operating

in the renewable energy sector in response to EBIT. SPSS assisted the researcher in analyzing

the collected data.

The associated assumption for descriptive statistics in this research included the

independence of the data. This assumption was that the financial data of all companies are
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different based on their financial performance. Consequently, variances are homogeneous

because the companies are from the same industry; therefore, any industry's influence affects all

companies' performance. The researcher expected the association between EBIT and the

financial distress of renewable energy firms to emerge in this study. The researcher aimed to

measure the relationship between EBIT, financial pain, and profitability of those firms operating

in the United States' renewable energy industry.

Research Questions

The following research questions guided this research study.

Main RQ: Does a relationship exist between EBIT and financial distress in renewable

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energy companies?
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RQ1: What is the relationship between EBIT and equity in renewable energy firms in the

United States?
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RQ2: What is the relationship between EBIT and net income in renewable energy firms

in the United States?

RQ3: What is the relationship between EBIT and liquidity in renewable energy firms in
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the United States?

Hypotheses

The research hypothesis is a testable and clear proposition about a probable result based

on presumable differences between variable relations (Disman & Barliana, 2017). It is an

essential step in quantitative research, as the researcher can establish prior expectations on study

results (Disman & Barliana, 2017). In this study, the researcher tested the following hypotheses.

H01: There is no relationship between EBIT and equity in renewable energy firms in the

United States.
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HA1: There is a relationship between EBIT and equity in renewable energy firms in the

United States.

H02: There is no relationship between EBIT and net income in renewable energy firms in

the United States.

HA2: There is a relationship between EBIT and net income in renewable energy firms in

the United States.

H03: There is no relationship between EBIT and liquidity in renewable energy firms in

the United States.

HA3: There is a relationship between EBIT and liquidity in renewable energy firms in the

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United States.

Significance of the Study

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The findings of the current research study are of great benefit to scholars, practitioners,
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and policymakers within the domain of renewable energy. First, the findings contributed

significantly to the existing literature by filling the knowledge gap regarding the absence of

studies on EBIT and financial distress, particularly in renewable energy firms. The current
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findings also provide a foundation for future researchers to evaluate the renewable sector's

financial performance. Second, the current study's findings may help leaders within the green

industries detect financial troubles much earlier, hence deploying corrective measures before

ultimate bankruptcy and insolvency occur. Additionally, the current study's findings can guide

policymakers in the renewable energy sector to develop policy measures that promote

sustainable energy generation, such as tax reliefs.

Definitions of Key Terms

EBIT: A synonym for ‘earnings before interest and taxes,’ EBIT refers to a company’s

profitability figures before tax and interest rate deductions to obtain net income.
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Financial distress: A situation in which a company is unable to service its debt

obligations to creditors.

Nonrenewable energy: The energy generates from sources that are both environmentally

unsustainable and exhaustible, such as fossil fuels.

Renewable energy: The energy generated from environmentally sustainable resources is

also inexhaustible, such as solar, wind, and hydroelectric power.

Summary

As an alternative to fossil fuels facing imminent depletion, numerous researchers and

practitioners have endorsed the emergence of the renewable energy sector. This endorsement

W
stems from the fact that green industries are sustainable and allow energy generation without
IE
exhausting the sources. Because the industry's primary characteristic is capital intensive, this

requires a reliable financing mode: debt financing. In turn, overreliance on debt financing
EV
exposes the sector to financial distress, which is the inability of firms to pay off their debts owed

to creditors. Meanwhile, EBIT stands out as an essential financial metric cited as a significant

predictor of financial struggles. In previous studies that examined EBIT as a predictor of

PR

financial troubles, the scope of investigation did not include the renewable energy sector. This

gap forms the basis of the current research. The investigator intended to determine whether a

significant relationship exists between EBIT and financial distress in the United States'

renewable energy sector. The researcher utilized a quantitative correlational case with linear

regression to examine this relationship. The findings of the current study inform academicians,

policymakers, and practitioners in the field of renewable energy.

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