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Spreads the cost of tangible and intangible assets over their useful lives, exposing the periodic non-cash charge that reflects ongoing asset consumption.
Depreciation and amortization are non-cash expenses that spread the cost of assets over time. They reduce reported profit but do not use cash in the current period, so they are added back when calculating cash flow.
Depreciation and amortization are non-cash expenses that spread the cost of assets over time. They reduce reported profit but do not use cash in the current period, so they are added back when calculating cash flow.
The distinction between the two:
- Depreciation: Applies to tangible assets like buildings, machinery, and equipment
- Amortization: Applies to intangible assets like patents, software, and goodwill
Why these expenses matter:
- Asset consumption: Reflects the using up of assets over their useful lives
- Tax benefits: Depreciation reduces taxable income, lowering cash taxes
- Capital intensity: High D&A indicates significant investment in long-term assets
- Reinvestment needs: Eventually, depreciated assets must be replaced
Cash flow implications:
- Added back to net income: Since no cash leaves the business, D&A is a source of operating cash flow
- Free cash flow component: EBITDA minus capital expenditures approximates cash generation
- Maintenance vs. growth capex: D&A roughly estimates maintenance capital requirements
Companies with high depreciation relative to capital expenditures may be underinvesting, while those with capex exceeding depreciation are expanding their asset base.
How it relates
EBITEBIT is earnings before interest and taxes. It measures operating profitability and is widely used to compare companies with different financing structures.+Depreciation & Amortization=EBITDAEBITDA is earnings before interest, taxes, depreciation and amortization. It shows operating performance before non-cash charges and is often used in valuations.
Net Income (CF Statement)Net income on the cash flow statement is the starting profit figure taken from the income statement. The cash flow statement then adjusts this number to move from accounting profit to actual cash generated.+Depreciation & Amortization+Stock-based CompensationStock-based compensation is the value of shares or options given to employees as part of their pay. It counts as an expense in profit, but it does not use cash directly in the period so it is added back in the cash flow.+
Where it fits
Depreciation & Amortization→Operating Cash FlowOperating cash flow is the cash the business generates from its normal day-to-day operations before investing and financing. It shows how much cash is coming in from customers after paying suppliers and operating costs.
Depreciation & Amortization→Total Non-current AssetsTotal non-current assets includes long-term items like property, equipment and long-term investments. These are assets the company expects to use for many years.
Depreciation & Amortization÷RevenueRevenue is the total amount of money the company earned from selling its products or services. It is the top-line number that reflects the overall size of the company's business.→Capital IntensityCapital intensity measures how much capital investment a company requires relative to its revenue, indicating the level of fixed assets needed to operate the business.