Fundamental Glossary / Financial Statements
Depreciation
The systematic charge that spreads the cost of a tangible asset over its useful life.
Formula
Straight line: (cost - residual value) / useful life. Written-down value charges a percentage of the remaining book value each year.
What it means
Buying a machine is a cash outflow today. Depreciation is the accounting that moves that cost into the profit statement over the years the machine is used.
It is a non-cash charge in later years. The cash left when the machine was bought. Adding depreciation back in EBITDA recognises that.
How to read it
If depreciation is a fair estimate of wear, EBIT is a better profit measure than EBITDA. If the company uses very long lives, depreciation is too small and profit is too high.
What to watch
A change in useful life or residual value changes profit with no change in the factory. The accounting-policy note is where that choice is disclosed.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.