## Depreciation vs Amortization: Why Investors Need to Know?

If you are a serious investor who reads financial statements regularly, these two terms will keep appearing: **Depreciation** (Depreciation) and **Amortization** (Amortization). They are behind the numbers of a company's profit and revenue. Once you understand them, analyzing EBIT and EBITDA becomes much easier.

### What is depreciation, really?

Depreciation is not a cash loss but a way to allocate the cost of tangible assets (Tangible Assets) over their useful life. Accountants use this method to reflect that machinery, buildings, or vehicles wear out over time.

**Hot Example**: A company buys a computer for 100,000 THB, expected to last 5 years. Each year, depreciation will be 20,000 THB, recorded as an expense in the income statement, even though the company does not pay out cash in that year.

### Basic Difference: Tangible vs Intangible Assets

**Depreciation** applies to tangible assets:
- Vehicles, buildings, machinery
- Office equipment, computers
- Furniture and structures

**Amortization** applies to intangible assets:
- Patents, copyrights
- Software
- Trademarks

Similarity: Both methods spread the cost over time to match expenses with the actual income generated in each period.

### Common Methods of Calculating Depreciation

#### 1. Straight-line Method (Straight Line)
The simplest way, allocating the same amount each year.

**Formula**: (Asset Cost - Salvage Value) ÷ Useful Life

Advantages: Easy to understand
Disadvantages: Does not reflect rapid loss of value in the early years

#### 2. Double-Declining Balance (Double Declining)
Accelerates depreciation in the first year, a good choice for businesses seeking higher tax deductions early on.

Advantages: Faster cash recovery, higher tax relief
Disadvantages: More complex

#### 3. Declining Balance (Declining Balance)
Similar to double-declining but with a slower rate of depreciation.

#### 4. Units of Production (Based on Usage)
Calculates depreciation based on actual usage, not time.

Suitable for: Factory machinery, trucks

**Example**: Machinery produces 1 million units over its lifespan. If it produces 100,000 units this year, depreciation is 1/10 of the asset's cost.

### Amortization: The Role Often Overlooked

Amortization refers to spreading the cost of intangible assets or debt payments over installments. Most commonly using the straight-line method.

**For intangible assets**:
- Patents, machinery costing 10,000 THB, lifespan 10 years = amortization of 1,000 THB per year
- Creative copyrights costing 50,000 THB, expected to last 5 years = amortization of 10,000 THB per year

**For loan repayments**:
- When you pay a car loan of 5,000 THB per month, most of the early payments go toward interest
- As you pay down the principal, interest decreases
- The total monthly payment remains the same

### EBIT vs EBITDA: Why Are They Different?

This is where depreciation and amortization play a key role in analysis.

**EBIT** = Earnings Before Interest and Taxes (Profit before interest and taxes)
- **Includes** depreciation and amortization as expenses

**EBITDA** = Earnings Before Interest, Taxes, Depreciation, and Amortization
- **Excludes** depreciation and amortization to show "pure" operating profit

**Why use EBITDA?**
- Companies with many fixed assets (e.g., hotels) will have high depreciation
- Companies leasing assets (e.g., tech startups) will have lower depreciation
- Using EBITDA allows for fairer comparisons across different industries

### Which assets qualify for depreciation?

Must meet these conditions:
- Belong to the company
- Used in operations or revenue generation
- Have a determinable useful life
- Expected to last longer than 1 year

**Qualifies**: Vehicles, buildings, machinery, computers, copyrights

**Does not qualify**:
- Land (Non-depreciable)
- Collectibles (Art, coins)
- Debt securities, stocks
- Personal property

### Key Points for Investors

Depreciation and amortization are non-cash expenses; they are accounting "costs" recorded in the books. Therefore:

- When reading financial statements, also check the **Cash Flow Statement** (Cash Flow Statement) for additional insights
- Companies with high depreciation may have higher maintenance expenses (Hidden costs)
- To compare companies fairly, focus on EBITDA rather than EBIT
- Growing companies (using double-declining balance) method will have higher tax deductions

Understanding these methods will help you read financial statements more deeply and make smarter investment decisions.