Income statement · Non-cash charges
Depreciation & Amortization: Definition, Formula & EBITDA Bridge
Depreciation and amortization (D&A) is the non-cash charge that allocates the cost of long-lived assets over time. It appears as an expense on the income statement, reducing operating income and net income — yet no cash leaves the business in that period. Understanding D&A is essential for reading an EBITDA bridge, modeling free cash flow, and sizing capital intensity across sectors. This guide covers the straight-line formula, Apple FY2024 as a worked example, how D&A connects to EBITDA, and sector benchmarks.
D&A is a non-cash charge that allocates the cost of tangible assets (depreciation) and intangible assets (amortization) over their useful lives. Straight-line depreciation = (Asset Cost − Salvage Value) ÷ Useful Life. Apple (AAPL) FY2024: ~$11.5B D&A on ~$44B PP&E and intangibles. EBITDA = Operating Income + D&A.
What Is Depreciation?
Depreciation is the systematic allocation of a tangible asset's cost over its estimated useful life. When a company buys a piece of equipment, a factory, or a fleet of vehicles, it cannot deduct the full purchase price from income in the year of purchase (except in limited tax contexts). Instead, accounting rules require spreading that cost over the asset's useful life — matching the expense to the periods in which the asset generates revenue.
The most common method is straight-line depreciation: divide the net cost (purchase price minus estimated salvage value) evenly across the asset's useful life. For tax purposes, the U.S. uses the Modified Accelerated Cost Recovery System (MACRS), which front-loads depreciation to create larger tax deductions in earlier years. This accelerated approach means a company's book depreciation (GAAP) and tax depreciation can diverge significantly, creating deferred tax liabilities on the balance sheet.
From an investor angle, depreciation is a real economic cost — the asset base is genuinely wearing out and will eventually need replacement — even though no cash leaves the business in the period the charge is recorded. Rising depreciation relative to revenue can signal two very different things: an aging asset base that needs heavy reinvestment, or aggressive acquisitions where goodwill and PP&E step-ups generate large depreciation charges for years after a deal closes.
What Is Amortization?
Amortization is the same concept applied to intangible assets — patents, customer lists, acquired technology, non-compete agreements, trademarks, and brand names acquired in a business combination. Like depreciation, amortization spreads the cost of an intangible over its estimated useful life, reducing operating income each period without a corresponding cash outflow.
One critical distinction: goodwill is treated differently under U.S. GAAP vs. IFRS. Under U.S. GAAP, goodwill is not amortized — instead, it is tested annually for impairment. If the acquired business deteriorates in value, a large goodwill impairment charge hits the income statement. Under IFRS, goodwill is also not amortized (post-2005), but the impairment testing approach differs in several important ways. This matters for cross-border comparisons: a European acquirer and a U.S. acquirer doing identical deals will report different post-acquisition income statements if one uses IFRS and the other uses GAAP.
For companies that grow through M&A, acquired intangible amortization can be a substantial drag on reported earnings — sometimes obscuring the underlying cash profitability. This is one reason acquirers frequently highlight "adjusted" or "cash" earnings that exclude acquired intangible amortization. Investors should understand whether that exclusion is reasonable (recurring M&A with real intangible value) or a recurring excuse to report higher numbers.
Straight-Line Depreciation Formula
Straight-line depreciation spreads the net cost of an asset evenly across its useful life. It is the most common method in GAAP financial statements.
- Formula
- Annual Depreciation = (Asset Cost − Salvage Value) ÷ Useful Life (years). If a machine costs $500K, has a $50K salvage value, and a 10-year life: Annual Depreciation = ($500K − $50K) ÷ 10 = $45K per year.
- Apple (AAPL) FY2024 Approximate Example
- Revenue ~$391B. D&A ~$11.5B. Net PP&E + intangibles ~$44B. Implied annual depreciation rate: $11.5B ÷ $44B ≈ 26% per year — reflecting a mix of shorter-lived tech equipment and longer-lived leasehold improvements.
- D&A as % of Revenue
- $11.5B ÷ $391B ≈ 2.9%. Apple is relatively light on D&A as a percent of sales because it outsources manufacturing (low owned PP&E) but carries meaningful intangible amortization from software and IP development.
These figures are approximate and derived from publicly available Apple annual report data. Actual 10-K line items may differ slightly depending on how PP&E, right-of-use assets, and acquired intangibles are grouped. Always verify against the primary filing.
D&A and the EBITDA Bridge
EBITDA starts with operating income and adds back D&A (and any other non-cash items) to approximate cash earnings before financing and taxes. The size of the D&A add-back determines how far EBITDA diverges from operating income.
- EBITDA Formula
- EBITDA = Operating Income + Depreciation + Amortization (+ other non-cash charges). The D&A add-back strips out the non-cash asset cost allocation to reveal operating cash generation before CapEx decisions.
- Apple FY2024 EBITDA Bridge (Approximate)
- Operating Income ~$123.2B + D&A ~$11.5B = EBITDA ~$134.7B. The D&A add-back represents roughly 9% of EBITDA — modest for Apple, but much larger for capital-intensive sectors.
- Why the D&A Add-Back Matters for Valuation
- D&A-heavy businesses (cable, industrials, telecom, semiconductors) look substantially cheaper on EV/EBITDA than on P/E, because D&A inflates the gap between EBITDA and net income. Comparing cable companies on P/E makes them look expensive; on EV/EBITDA they look normal. The right multiple depends on whether D&A represents a real recurring reinvestment need (maintenance CapEx) or a legacy step-up from M&A accounting.
A common misstep: treating all D&A add-backs as equally valid. If D&A meaningfully understates the true reinvestment needed to maintain the business — common in capital-heavy industries — then EBITDA overstates sustainable cash flow. Always compare D&A to maintenance CapEx. When D&A significantly exceeds maintenance CapEx, EBITDA is a fair proxy for cash earnings; when they diverge the other way, EBITDA flatters the picture.
Sector Benchmarks: D&A as % of Revenue
D&A intensity varies enormously by industry — from under 3% in capital-light software to over 20% in telecom and cable. These differences explain why sector-appropriate valuation multiples matter.
| Sector | D&A % of Revenue | Why |
|---|---|---|
| Technology (software/SaaS) | ~2–5% | Mostly intangible amortization from M&A; minimal owned PP&E since infrastructure runs on leased cloud capacity |
| Technology (hardware/semiconductors) | ~5–10% | Chip fabs and test equipment are capital-intensive; semiconductor equipment lives of 5–10 years drive meaningful annual depreciation |
| Industrial / Manufacturing | ~4–8% | Heavy machinery with long useful lives (15–30 years); moderate D&A intensity relative to asset base |
| Telecom / Cable | ~15–25% | Network infrastructure, spectrum licenses, and acquired intangibles create the largest D&A/revenue spread; EV/EBITDA and EV/EBIT will diverge most here |
| Retail | ~2–4% | Store fixtures, leasehold improvements, and point-of-sale systems; relatively short asset lives but low cost base per revenue dollar |
Higher D&A % → larger EBITDA/operating income gap → EV/EBITDA and EV/EBIT will diverge most. The right multiple to use depends on whether the D&A reflects a real recurring reinvestment need or a one-time M&A accounting step-up.
D&A as a Cash Flow Add-Back
On the operating cash flow statement, D&A is almost always the first and largest add-back to net income. The reason is straightforward: D&A was subtracted from revenue to calculate operating income and net income, but it is a non-cash charge — no cash left the business in that period. Adding it back converts accrual-based net income toward a cash basis.
The key free cash flow relationship is: FCF = Operating Income + D&A − CapEx (simplified). D&A and CapEx are two sides of the same asset lifecycle. D&A reflects the accounting cost of assets already in service; CapEx is the cash spending to maintain and expand the asset base. When D&A is persistently higher than CapEx, the company is spending less to maintain its assets than they are depreciating — a potential red flag that the physical or technological asset base is deteriorating faster than it is being reinvested.
Conversely, companies in growth-investment phases will run CapEx well above D&A as they build out capacity. In steady-state mature businesses, CapEx and D&A often converge. The CapEx/D&A ratio is a quick diagnostic: below 1.0 suggests underinvestment; above 1.5 suggests a growth phase. Neither is inherently good or bad — the context of the business cycle matters.