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Combines the periodic non-cash charges for both tangible and intangible asset consumption on the income statement, exposing total asset wear reflected in reported earnings.
Income statement depreciation and amortization is the combined non-cash expense for both tangible and intangible assets. It reduces reported earnings but does not affect cash flow.
Depreciation and amortisation (D&A) on the income statement represents the combined non-cash expense for allocating the costs of both tangible assets (depreciation) and intangible assets (amortisation) over their useful lives. These expenses reduce reported income but don't consume cash, making D&A a critical adjustment when analysing cash flow and calculating metrics like EBITDA.
The components:
- Depreciation: Physical assets—property, plant, equipment, vehicles
- Amortisation: Intangible assets—patents, customer relationships, technology
Income statement impact:
Operating Income = Revenue - COGS - Operating Expenses (including D&A)
Why D&A matters:
- Profitability measure: Affects operating income and net income
- EBITDA calculation: EBITDA = Operating Income + D&A
- Cash flow reconciliation: Added back to net income to calculate operating cash flow
- Capital intensity indicator: High D&A suggests significant asset base
Analysing D&A:
- D&A as % of revenue: Indicates capital intensity
- D&A vs. CapEx: Shows whether assets are being replaced or depleted
- Trend analysis: Changes reflect asset base growth or reduction
Industry variations:
- Utilities: 10-15% of revenue; massive infrastructure
- Manufacturing: 5-10% of revenue; significant equipment
- Retail: 3-6% of revenue; store build-outs and fixtures
- Software: 2-4% of revenue; minimal physical assets
D&A and maintenance CapEx:
- D&A ≈ Maintenance CapEx: Assets being maintained (roughly)
- CapEx > D&A: Net investment in growth
- CapEx < D&A: Asset base declining; potential underinvestment
Important perspective:
While D&A is non-cash, it represents real economic consumption of assets that must eventually be replaced. Treating D&A as "not real" because it's non-cash ignores the capital required to maintain business operations. Use EBITDA for certain analyses, but always consider that assets require replacement investment.
Track D&A trends alongside capital expenditure patterns to understand whether a company is investing sufficiently to maintain its competitive position and asset base.