Have you ever wondered what depreciation means and why companies care about it? Let’s understand the concept of depreciation because it has a greater impact on a company's financial analysis than you might think.

Simply put, depreciation is the process of allocating the cost of an asset that a company has purchased over its useful life. Over time, the value of machinery, vehicles, or computers decreases. Depreciation helps companies present the appropriate asset values in their financial statements.

The important thing to know is that depreciation is not arbitrary. It depends on the expected useful life of the asset. For example, a laptop typically lasts about 5 years, while a car might last longer. Therefore, companies need to allocate expenses reasonably.

There are several methods to calculate depreciation. The straight-line method is the simplest: you divide the asset’s cost evenly over its useful life. If a car costs 100,000 baht and has a 5-year lifespan, the annual depreciation expense is 20,000 baht. The double-declining balance method results in higher depreciation in the early years, suitable for businesses that want to recover costs quickly.

What about amortization? It’s similar to depreciation but applies to intangible assets like copyrights, patents, or software. It’s also used in loan repayment calculations. When you borrow money, each monthly payment is split into interest and principal. Initially, more goes toward interest, but over time, the principal portion increases.

The main difference between depreciation and amortization is that depreciation applies to tangible assets (buildings, machinery), while amortization applies to intangible assets and loans. The calculation methods differ as well: depreciation has various methods, but most amortization uses the straight-line approach.

Why should investors care? Because depreciation affects EBIT (Earnings Before Interest and Taxes). If a company has many fixed assets, depreciation expenses will be high, reducing net profit. However, if you look at EBITDA (which adds back depreciation), you get a clearer picture of the company’s true earnings.

Which assets can be depreciated? Mostly those owned by the company, used in business, with a determinable useful life, and lasting more than a year—such as vehicles, buildings, office equipment, machinery. Land, accumulated assets, or investments in stocks and bonds cannot be depreciated.

In summary, depreciation and amortization are essential tools for understanding a company's finances. If you want to analyze a company deeply, you need to understand what depreciation means and how it impacts financial figures.