Financial Statement Basics

Depreciation & Amortization (D&A)

Depreciation & Amortization

At a glance

Spreading the yearly decline in value of a long-lived asset out as an expense — an expense with no cash going out.

Example: equipment costing $10M used for 10 years is expensed at $1M per year

Large depreciation often means a capital-intensive business with lots of equipment and facilities (manufacturing, telecom, airlines).

In plain terms

Imagine a machine bought for $1 million and used for 10 years. Instead of recording the whole cost in the year of purchase, $100,000 is recorded each year. That is depreciation.

For tangible assets such as factories and machines it is called depreciation; for intangible assets such as patents and goodwill it is called amortization. Together they are referred to as D&A.

What it tells you

Depreciation is an expense where "no cash actually goes out." The money already went out when the asset was purchased (capital spending, CapEx), and depreciation just recognizes that on the books over several years.

That's why this non-cash expense is added back when calculating operating cash flow or EBITDA.

Formula

Example: equipment costing $10M used for 10 years is expensed at $1M per year

What high or low means

Large depreciation often means a capital-intensive business with lots of equipment and facilities (manufacturing, telecom, airlines).

Depreciation reduces profit but no cash goes out, so cash flow often comes out higher than book profit.

Caution

No cash goes out for depreciation, but that doesn't make it "free." Assets have to be replaced eventually, and that takes cash again (CapEx).

That's why you want to watch for the illusion that EBITDA looks better because this depreciation has been taken out (the more a company spends on equipment, the more so).

Metrics to read alongside

EBITDA (earnings before depreciation and amortization)

EBITDA is operating profit with depreciation and amortization (D&A) added back. Knowing what depreciation is helps you understand why EBITDA is closer to cash from the core business.

CapEx (capital spending)

Depreciation spreads the cost of assets bought in the past, while CapEx is cash spent buying assets now. Looking at them together gives you a sense of the past and present of money put into assets.

See it in real stocks

Search US stocks on Stocklore to see SEC-filing-based financial metrics alongside the sector benchmark.

COP ConocoPhillips LMT Lockheed Martin Corporation CAT Caterpillar Inc.ZTS ZOETIS INC.RIVN Rivian Automotive, Inc.GOOGL Alphabet Inc. Class A Search stocks →

Exactly how Stocklore computes this metric (formula, thresholds, SEC source) is on the methodology page.

This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.