Depreciation and Amortization

Depreciation is a reduction in the value of an asset with the passage of time. It records the loss in value of machines, equipment, or cars that the company purchased due to wear and tear.

Amortization means prorating the cost or machines, equipment, or cars over a period of years. Or it is also the paying off of debt in regular installments over a period of time.

Depreciation/Amortization is an expense that needs to be considered when searching for a company with a Durable Competitive Advantage. Making investments on equipment that falls in value due to wear and tear is like throwing money away.  Therefore, we are interested in companies whose business model does not require huge equipment purchases. We compare Depreciation/Amortization to Gross Profit to see how much  the company's equipment expenses are eating away profits. As a guide, the ratio Depreciation/Amortization to Gross Profit, should be less than 10%. Less is better.

 

Equation

 

Depreciation/Amortization

 

Example 1

Cola-Cola does not have any recorded Depreciation/Amortization expenses in the year 2010. Their Gross Profit for that year was $22.426 Billion.

 

Date: Year 2010
Company: Coca-Cola
Depreciation/Amortization: $0
Gross Profit: $22.426 Billion

 

Depreciation/Amortization of Coca-Cola

 

Coca-Cola does not record their Depreciation/Amortization expense on their Income Statement, however, it is probably being recorded someplace else.

 

Example 2

IBM spent $289 Million is Depreciation/Amortization cost in the year 2011 with Gross Profits of $50.138 Billion.

 

Date: Year 2011
Company: IBM
Depreciation/Amortization: $289 Million = $0.289 Billion
Gross Profit: $50.138 Billion

 

Depreciation/Amortization of IBM

 

Even though IBM has Depreciation/Amortization expenses, it is extremely very low. They mostly provide computer and software services as opposed to Oracle Corporation who mostly sells computer hardware and software programs.

 

Example 3

American Airlines has $1.093 Billion in Depreciation/Amortization costs in 2010 and Gross Profits of only $1.719 Billion.

 

Date: Year 2010
Company: American Airlines
Depreciation/Amortization: $1.093 Billion
Gross Profit: $1.719 Billion

 

Depreciation/Amortization of American Airlines

 

American Airlines has an extraordinary huge expense on Depreciation/Amortization. They filed for bankruptcy in November 2011.

 

My Financial Analysis of Stocks

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    Posted Mar 30, 2020, 8:35 PM by Intelligent Investor
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    Posted Mar 18, 2020, 9:21 AM by Intelligent Investor
  • Beyond Meat (BYND) and Dunkin (DNKN), The End Of A Tale Of 2 Speculative Stocks During a recession speculative stocks get pounded down to the ground. Thus, we sold all of our shares of Beyond Meat (BYND) and Dunkin' Donuts (DNKN). Beyond Meat is in ...
    Posted Mar 18, 2020, 9:22 AM by Intelligent Investor
  • The Dow Jones Rallies 1294 Points, Sold More Stocks On This Dead Cat Bounce The Dow Jones jumps 1294 points a few days ago, however, we believe that this rally is a "dead cat bounce". We have to wait for the next quarter's ...
    Posted Mar 16, 2020, 9:56 PM by Intelligent Investor
  • We Panic Sold Today was a really bad day in the market. The Dow Jones opened at negative 1000 points. It seems as if the coronavirus is gaining steam and is about to ...
    Posted Mar 18, 2020, 9:23 AM by Intelligent Investor
  • I'm Calling Tops, It's Over, The Bull Market Is Over, Here Comes The Bear Market, A Recession Is Coming We weren't sure yesterday that the bull market is over. In the morning today, the Dow Jones was up about 300 points, and I thought we were just having ...
    Posted Mar 1, 2020, 10:47 AM by Intelligent Investor
  • Went On A Selling Spree Today I think this stock market bull run is over. I just have a hunch that it's over. However, I've been wrong before. The deadly coronavirus outbreak seems to ...
    Posted Feb 24, 2020, 10:41 PM by Intelligent Investor
  • Sold Apple (AAPL) At What Looks Like A Peak Apple (AAPL) looks like it may have peaked at $325/share. News came out during the past couple of days that Apples largest factory in China that makes iPhones is ...
    Posted Mar 18, 2020, 9:26 AM by Intelligent Investor
  • Beyond Meat (BYND) and Dunkin (DNKN), A Tale Of 2 Speculative Stocks Last year, we bought Dunkin' Donuts (DNKN) and Beyond Meat (BYND). We couldn't find any bargains, so we invested a small amount in these 2 speculative stocks.I've ...
    Posted Mar 18, 2020, 9:27 AM by Intelligent Investor
  • Stocks That We Bought and Sold for the Past Year to Date Sold John Deere (DE), it is a cyclical business and the trade war the U.S. has with China isn't making things any better. Berkshire Hathaway also sold their ...
    Posted Jul 27, 2019, 12:04 PM by Intelligent Investor
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