# depreciation relative to capex?

If you have a company that over the long run has an average depreciation & amortization expense that is HALF of their average capex & business acquisition spend … would it be ok to assume they are writing down their assets over 2 years on average?

i would argue that in the short run that is possible but not in the long run. assume all capex is made on 12/31. year 1 - if you saw d&a of 10. that would mean you would expect capex of 20. year 2 - if they depreciated over 2 yrs, you’d have d&a of 15 (half of year 1’s d&a plus half of lasts year’s capex). that would mean you’d expect capex to be 30. year 3 - you’d depreciate the second half of the year 1 capex (10) plus the first half of the year 2 capex (15), giving you total d&a of 25. expected capex would then be 50. you can see how you could do this in the short run, but not long run. your depr and capex should be a much closer number. i don’t think they should necessarily be the same, due to inflation in capex compared to historical cost for depr, but capex can’t be twice as much forever.

Ok, first the reason that depreciation and amortization can differ dramatically from capex and biz acquisition costs over the long run is because some acquisitions (i.e. goodwill) don’t have to be depreciated ever. Capex & business acquisitions costs are given. I’m not making any assumption about that. Year 1 capex & biz acquisition costs \$20 year 1 depreciation & amort \$10 year 2 capex & biz acquisition costs \$20 year 2 depreciation & amort \$10 year 3 capex & biz acquisition costs \$20 year 3 depreciation & amort \$10 Etc. etc. etc. for 20+ years. So, I’m asking…Does this example say ANYTHING about the speed at which they write off assets? If you, in general, knew their assets had a longer life than 2 years could… how much could you infer about the intrinsic value of the assets (vs. the book value).

I seem to remember something about total fixed capital divided by avg annual depreciation produces some estimate of how quickly fixed assets are being written off. I don’t think amortization is included in that, except maybe capitalized interest. Man, I’m so happy I’m doing L3 and don’t have to bang my head on all this accounting stuff this time around.

Capex & business acquisitions costs are given. I’m not making any assumption about that. Year 1 capex & biz acquisition costs \$20 year 1 depreciation & amort \$10 year 2 capex & biz acquisition costs \$20 year 2 depreciation & amort \$10 year 3 capex & biz acquisition costs \$20 year 3 depreciation & amort \$10 Etc. etc. etc. for 20+ years. So, I’m asking…Does this example say ANYTHING about the speed at which they write off assets? -------------------------------------- No. Without knowing what capex was before that time period, that example is just telling you that roughly half of their capex and biz acquisition costs are not being depreciated at all.

“Year 1 capex & biz acquisition costs \$20 year 1 depreciation & amort \$10 year 2 capex & biz acquisition costs \$20 year 2 depreciation & amort \$10 year 3 capex & biz acquisition costs \$20 year 3 depreciation & amort \$10” again for simplicity, assume all capex is made on 12/31. if year 1 capex is 20, you depreciate half of that (10) in year 2 and half in year 3. if year 2 capex is 20, you depreciate half of that in year 3 and half in year 4. we’ve already determined that year 3 depreciation will be 20 - 10 from year 1 capex and 10 from year 2 capex. for year 3 capex to be twice that of year 3 depreciation, you’ll need to spend 40. that’s possible in the short run but not the long run. your capex can’t logically increase exponentially like that. of course, that doesn’t apply with goodwill acquired in acquisitions but it does apply with definite-lived intangibles acquired in an acquisition. i still say, though, that long term, you can’t have capex twice as high as depreciation.