Financial analysis : Question 9
How does the accountant’s definition of “depreciation” differ from that of financial analysts and economists.

For the accountant, depreciation is the economic wear and tear of an asset that has to be converted into monetary terms in order to reflect a fair result and a fair amount on the balance sheet, without any overvaluation of assets.

For the financial analyst, and in a slightly provocative way, depreciation is not of great importance as it is not a cash flow! The financial analyst seeks to maximise depreciation in the short term, in order to shift the tax burden forward in time, thus saving money given the time value of money.

In terms of valuation, depreciation is becoming less and less of an issue because current practice is to value companies using the EBITDA multiple, although more so in some sectors (media, utilities) than in others, but there is a clear trend.