The noncash charges taken against a company's profits for the deterioration of an asset's value over its useful life. Depreciation & Amortization is shown in millions of dollars ($M). Depreciation refers to the reduction in value of a tangible asset, and amortization refers to the reduction in value of an intangible asset such as goodwill.
Origin
This information is found on the cash flow statement of the company’s financial statement.
Benefit
Depreciation and amortization is a noncash charge that companies subtract from earnings on their income statement. It has no effect on cash flows. To make matters worse, different companies calculate depreciation and amortization differently, fogging up earnings comparisons across companies. To get a true picture of how much money a company’s operations generate in a given period, we need to add back depreciation and amortization to net income when we calculate cash flow from operations. Depreciation and amortization will be especially big for companies that invest a lot, whether in new plant and equipment, or in buying other companies.
For the Pros
Here’s a trick some investors use to calculate an alternative to free cash flow, or the cash that’s left over after a company makes necessary investments in its business. Typically the way free cash flow is generated is to subtract capital spending from total cash flow from operations. But capital spending includes both necessary investments in the upkeep of the business, and investments to boost the overall size of the business. By subtracting depreciation and amortization from cash flow from operations, one can get a modified version of free cash flow—one that leaves out most of the investment related to boosting the size of the business. Why? Because depreciation is a proxy for the wear and tear of factories, machinery, etc., so it roughly equals the amount a company would need to spend to maintain its business as is. Therefore, some investors define free cash flow as:
Cash flow from operations – depreciation and amortization