Lesson 6 of 7
Depreciation arrives late
Capital spending peaked and fell 36 percent. The depreciation charge kept rising for three more years and reached half of revenue in the worst of them.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Depreciation is a charge on assets bought in earlier years, so it keeps rising after the spending that created it has stopped.
- At one filer, capital spending fell 36 percent in a year while the depreciation charge rose 9 percent, and it has risen in every year since.
- A margin condition on a capital-intensive filer therefore has a slow, one-way pressure inside it that nothing in the year's trading explains.
Of all the reasons a capital-intensive company's margin falls in a bad year, this is the one that is decided years earlier and cannot be changed by anything management does in the year itself.
Capital spending and the depreciation charge at one filer, seven filed years
- Capital expenditure
- Depreciation and amortisation
Show the numbers
| Capital expenditure | Depreciation and amortisation | |
|---|---|---|
| FY19 | 9,780$m | 5,424$m |
| FY20 | 8,223$m | 5,650$m |
| FY21 | 10,030$m | 6,214$m |
| FY22 | 12,067$m | 7,116$m |
| FY23 | 7,676$m | 7,756$m |
| FY24 | 8,386$m | 7,780$m |
| FY25 | 15,857$m | 8,352$m |
Why the charge lags
Because an asset is depreciated over its useful life, starting when it enters service. A payment made in one fiscal year becomes a charge spread across the several years after the asset is ready.
So the charge in any year is the accumulated consequence of spending decisions taken over the preceding life of the asset base. It is a fact about the past that the income statement reports in the present.
The lag, measured
At the filer above, capital spending peaked at 12,067 million dollars in fiscal 2022 and fell to 7,676 million in fiscal 2023, a reduction of 36.4 percent.
The depreciation charge over the same two years went from 7,116 million to 7,756 million, an increase of 9.0 percent. It rose again in fiscal 2024 to 7,780 million and again in fiscal 2025 to 8,352 million. Three consecutive increases after the spending fell.
Across the whole seven years shown, capital spending moved between 7,676 and 15,857 million, a range of more than two to one, while the depreciation charge rose every single year, from 5,424 million to 8,352 million.
What this does to a condition
It puts a slow, one-way pressure inside any margin condition on such a company, and the pressure has nothing to do with the year's trading.
A reader who writes a gross margin condition at a filer whose asset base is growing has written a condition that will drift downwards even if pricing, volume and efficiency are all unchanged, because the denominator of the charge keeps growing. That is not an argument against the condition. It is an argument for writing beside it what the charge was doing when the level was set.
The one thing that can reverse it
An impairment. Writing an asset down reduces the base the charge is computed on, so a large impairment lowers depreciation in every year after it. A reader who sees a depreciation charge fall sharply should look for the impairment before concluding anything about the asset base, because the two are the same event seen from different statements.
Check yourself
Why does the depreciation charge keep rising after capital spending falls?
- Because useful lives are shortened in bad years
- Because the charge is spread over the life of assets bought earlier, so it reports past decisions in the present
- Because inflation raises the carrying value
Show the answer
Answer: B.
At the filer above, spending fell 36.4 percent in one year and the charge rose in that year and in each of the two after it.The charge went from 23.1 percent of revenue to 49.9 percent. How?
- The charge more than doubled
- The charge rose 9 percent while revenue fell 49.5 percent
- An impairment was taken
Show the answer
Answer: B.
An impairment would have reduced the charge in later years, not raised the ratio. Both halves moved, and the denominator moved much further.A filer's depreciation charge falls sharply. What should be checked first?
- Whether capital spending fell
- Whether an impairment reduced the base the charge is computed on
- Whether the fiscal year changed length
Show the answer
Answer: B.
Writing an asset down lowers depreciation in every year after it. The two are the same event seen from two statements.Sources
- Micron Technology, Inc., annual reports on Form 10-K for fiscal years 2019 through 2025, for capital expenditure, depreciation and amortisation and revenue: fiscal 2019 accession 0000723125-19-000094; fiscal 2020 accession 0000723125-20-000082; fiscal 2021 accession 0000723125-21-000065; fiscal 2022 accession 0000723125-22-000048; fiscal 2023 accession 0000723125-23-000054; fiscal 2024 accession 0000723125-24-000027; fiscal 2025 accession 0000723125-25-000028.
- ASC 360, Property, Plant, and Equipment, for depreciation over useful life and for impairment.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- Depreciation and amortisation as reported in the cash flow statement includes amortisation of intangibles, so it is not purely a charge on property, plant and equipment.
- The charge as a share of revenue is a ratio of a full-year charge to full-year revenue. It does not establish how much of the charge sits in cost of revenue rather than in operating expenses.
- Nothing here is a view on Micron or on any security.