Accounting
What is Depreciation?
Depreciation is the systematic allocation of a tangible asset's cost over its useful life, it reduces reported profits without any actual cash outflow.
Formula
Straight-Line: (Cost - Salvage Value) ÷ Useful Life. WDV: Cost × Depreciation Rate.
How to Interpret
Depreciation is a non-cash expense. Companies with heavy depreciation may show lower profits but strong cash flows. Add it back when calculating EBITDA or free cash flow.
Typical Ranges
Compare depreciation as % of revenue within the same industry. Rising D&A/Revenue may signal heavy capex cycles.