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Glossary
Profit & cash

Depreciation

Spreading the cost of a physical asset over the years it is used.

Buy a machine for £10m that lasts ten years, and the accounts charge £1m a year rather than £10m in year one. No cash moves in those later years, which is why it is added back in the cash flow statement.

It is genuinely non-cash, and it is genuinely a real cost. The machine will need replacing. EBITDA's central conceit is pretending the first fact cancels the second.

Figure

The divergence that precedes most disasters

Y1Y2Y3Y4Y5Reported profitOperating cash

Reported profit climbing while the cash it supposedly generated goes nowhere. Either customers are not paying, or the sales were never really made.

Why it matters

It is the bridge between profit and cash flow, and the biggest single reason they differ.

The mistake everyone makes

Believing depreciation is a fictional cost because no cash moves this year. The cash moved when the asset was bought, and will move again when it is replaced.

Related terms

EBITDA
Profit before the four things that make companies look different from one another.
Capex
Money spent on physical assets: factories, machines, servers, vehicles.
Amortisation
Depreciation, but for intangible assets like patents and software.

See Depreciation on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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