Metric Explainer: Depreciation & Amortisation
A noncash expense that spreads the cost of buildings, machines, and equipment over their useful life — like "using up" an asset slowly on the books. "Depreci...
Simple definition
A non-cash expense that spreads the cost of buildings, machines, and equipment over their useful life — like "using up" an asset slowly on the books.
🗣️
"Depreciation matlab machine ki value har saal thodi thodi kam hoti hai books mein. ₹10 Cr ki machine 10 saal mein ₹1 Cr per year ghisti hai."
Why it matters
- Non-cash expense — reduces reported profit but no actual cash goes out
- Bridge between EBITDA and EBIT — D&A is the only difference
- Added back in CFO — cash flow statement adds D&A back to compute operating cash flow
- Capital intensity indicator — high D&A relative to revenue = asset-heavy business
Formula
Depreciation = Cost of Asset / Useful Life (Straight-Line Method)
Total D&A = Depreciation on tangible assets + Amortisation of intangible assets + ROU asset depreciation (leases)
Types of depreciation
| Method | How it works | Used by |
|---|---|---|
| Straight-Line (SLM) | Equal amount each year | Most Indian companies (IndAS default) |
| Written Down Value (WDV) | Higher in early years, declining | Some companies for tax; Income Tax Act |
| Units of Production | Based on actual usage/output | Mining, airlines |
D&A as % of revenue — by sector
| Sector | Typical D&A % | What drives it |
|---|---|---|
| IT Services | 2–5% | Offices, servers — light assets |
| FMCG | 3–6% | Manufacturing plants |
| Steel/Cement | 8–15% | Blast furnaces, kilns — heavy capital |
| Telecom | 15–25% | Towers, spectrum, fibre (very heavy) |
| Pharma | 4–8% | Manufacturing plants, R&D equipment |
| Airlines | 15–30% | Aircraft fleet depreciation |
Common mistakes
Mistakes to avoid
- Assuming D&A = cash spending — It's a non-cash charge. The cash was spent when the asset was purchased (capex)
- Companies can manage D&A — Changing useful life estimates (e.g., 10 years to 15 years) reduces annual D&A and inflates profit
- Ignoring IndAS 116 leases — Lease payments are now split into D&A + interest, inflating EBITDA vs pre-IndAS 116 reporting
- Not linking to capex — High capex today means higher D&A tomorrow
Real example: D&A impact on profit comparison
| Metric | Airtel (Telecom) | TCS (IT) |
|---|---|---|
| Revenue | ₹1,50,000 Cr | ₹2,40,000 Cr |
| EBITDA Margin | 53% | 27% |
| D&A | ₹38,000 Cr (25%) | ₹6,000 Cr (2.5%) |
| EBIT Margin | 28% | 24.5% |
Airtel's EBITDA margin (53%) looks spectacular, but after massive D&A from spectrum and towers, EBIT drops to 28%. TCS barely changes from EBITDA to EBIT. D&A reveals the true cost of capital-intensity.
Red flags
- D&A declining while PPE is growing — depreciation policy may have been loosened to inflate profit
- D&A significantly lower than capex for many years — assets aging fast, may need large replacement
- Sudden spike in amortisation — large goodwill/intangible write-down from a failed acquisition