Depreciation (Depreciation) and Amortization: What Investors Should Know

Why Understanding EBIT and EBITDA Matters First

When comparing the performance of two companies, if one has a lot of machinery and the other almost no fixed assets, the results can differ significantly because EBIT(Earnings Before Interest and Taxes) deducts depreciation and amortization.

On the other hand, EBITDA adds these back into profit, providing a clearer picture of the company’s true revenue-generating capacity. That’s why investors need to understand the difference between these two metrics.

What Is Depreciation Really?

Depreciation(Depreciation) isn’t as complicated as it seems. It’s the process of recording the decreasing value of a company’s assets gradually over time. It recognizes the fact that the company’s assets()such as vehicles, buildings, machinery()depreciate over time.

For example, if a company buys a car for 100,000 THB and expects to use it for 5 years, it must record 20,000 THB of depreciation each year in its financial statements. This method helps the accounting reflect the actual value of assets more accurately.

Which Assets Can Be Depreciated?

According to accounting standards, assets that can be depreciated must meet these conditions:

• Owned by the company
• Capable of generating income
• Have a clear useful life
• Expected to last longer than 1 year

Common depreciable assets include vehicles, office buildings, furniture, computers, machinery, and even intangible assets like copyrights, patents, and software.

Assets that cannot be depreciated include land###(non-depreciable), collectibles, stocks and bonds, personal property, or anything used for less than 1 year.

The 4 Main Methods of Depreciation Calculation

1. Straight-line (Straight-line)

The simplest and most stable method, deducting the same depreciation each year. This approach is suitable for small businesses. However, its downside is that it doesn’t account for rapid loss of value in the early years or increased maintenance costs as assets age.

2. Double-declining balance (Double-declining balance)

This method depreciates more in the initial years and then gradually lessens. It’s suitable for businesses that want to recover asset value quickly or aim for higher tax deductions early on. The downside is it’s more complex to calculate.

( 3. Declining balance )Declining balance### An accelerated method that applies a fixed rate(such as twice the straight-line rate) to the remaining book value each year. This results in higher depreciation costs at the start, decreasing over time.

( 4. Units of production )Units of production( Depreciates based on usage, such as hours worked or units produced. It’s the most flexible method but requires close tracking of usage. Not suitable for assets difficult to measure in terms of utilization.

How Is Amortization Different?

Amortization)Amortization( is similar to depreciation in financial statements but applies to intangible assets)such as copyrights, patents, trademarks(, or installment payments.

For example, if you buy a patent for 10,000 THB expected to last 10 years, you would record 1,000 THB of amortization annually.

Another example: if you borrow 10,000 THB and repay 2,000 THB principal each year, the amortization of the loan in the first year is 2,000 THB.

The key point: amortization almost always uses the straight-line method because intangible assets tend to depreciate more evenly.

3 Key Differences

Asset Type: Depreciation applies to tangible assets)such as buildings, machinery(, while amortization applies to intangible assets)such as copyrights, patents(.

Calculation Method: Depreciation has multiple methods)straight-line, declining balance, units of production, but amortization is almost always straight-line.

Residual Value: Depreciation considers salvage valuethe estimated selling price at the end of useful life, while amortization usually assumes zero residual value once the asset’s useful life ends.

Why Is This Important for Investors?

When analyzing a company, understanding depreciation and amortization helps reveal the true profit picture. Some companies choose methods that make profits look higher, while others use methods that offer higher tax deductions.

Comparing EBIT with EBITDA helps you avoid being misled by asset-heavy accounting and see the company’s actual cash-generating ability. This understanding is valuable for investment decisions and assessing financial transparency.