Depreciation and amortization (D&A) are not cash expenses, but accounting adjustments that reflect how assets lose value over time. Knowing this figure serves various purposes:
📌 1. Analyze actual operating profitability
EBITDA shows the 'ability to generate cash' without considering depreciation and amortization.
EBIT does include these expenses, providing a closer view of operating profit.
Example: A company with expensive machinery will have high depreciation. EBITDA will say 'it looks very profitable', but EBIT will show that profitability decreases once those costs are recognized.
📌 2. Compare companies with each other
Two companies with different assets (one machinery-intensive, the other software-intensive) can have similar EBITDA, but EBIT will differ due to depreciation.
D&A helps to see how 'heavy' a company's asset structure is.
📌 3. Company Valuation
Investors use EBITDA to see operating cash flow before non-cash expenses.
D&A is key to calculating metrics like EV/EBITDA or EV/EBIT in valuations.
📌 4. Financial Planning
A company needs to know how much its machinery depreciates or how much it amortizes its patents to plan future investments (CAPEX).
👉 In summary:
Knowing the D&A figure helps understand the difference between accounting profit and actual cash flow, in addition to measuring the 'burden' of the company's assets.