Depreciation is a common accounting term that refers to the decrease in the value of an asset over time. 

When a company purchases an asset, such as equipment or a building, the value of that asset will decrease over its useful life due to wear and tear, obsolescence, or other factors. 

Depreciation is a way of recognizing this decrease in value over time, and it is typically used for tax and accounting purposes.

The question of whether depreciation should be taken into account is an important one for businesses, investors, and analysts. 

There are arguments both for and against taking depreciation into account when analyzing a company’s financial statements.

On one hand, depreciation can be seen as a non-cash expense, meaning that it does not require any cash outlay from the company. 

Therefore, some argue that it should not be included in certain financial metrics, such as earnings before interest, taxes, depreciation, and amortization (EBITDA). This is because EBITDA is intended to provide a measure of a company’s operating performance, and depreciation does not directly affect cash flow.

On the other hand, depreciation can be seen as an important indicator of a company’s capital expenditures and the health of its assets. 

By taking depreciation into account, investors and analysts can gain a better understanding of a company’s cash flows and the amount of capital it is investing in its business. Additionally, depreciation can help to smooth out fluctuations in earnings over time, which can make it easier to compare financial performance across different periods.

Ultimately, whether depreciation should be taken into account depends on the specific context and purpose of the analysis.

For example, if a company is being evaluated for a potential acquisition, it may be more appropriate to use metrics that take depreciation into account in order to better understand the company’s asset base and future capital needs. 

On the other hand, if a company is being evaluated solely on its operating performance, metrics that exclude depreciation may be more appropriate.

In conclusion, while there are arguments both for and against taking depreciation into account, the decision ultimately depends on the specific context and purpose of the analysis. 

By better understanding the role of depreciation and its impact on financial statements, investors and analysts can make more informed decisions about a company’s financial health and future prospects.

Want to learn more about M&A? Click the link below!